Beyond the Supreme Court, Judge Griesa, and Elliott Associates’ own (rather remarkable) media offensive telling Argentina to talk before the pari passu screws turn…
It comes down to the Republic’s own incentives to settle. Especially when it’s been such a “uniquely recalcitrant” debtor for so long.
And so — while it might seem a long way from the pari passu saga — we’re interested in this week’s news (via Ambito) that Argentina wants to pay $500m (in bonds) to settle with five companies and get them to stop suing it through ICSID, the World Bank’s investment arbitration tribunal…
Change in the air? Change which might spread to NML v Argentina?
One of those companies is Blue Ridge Investments LLC — a Bank of America subsidiary for investing in distressed assets.
Years ago, Blue Ridge snapped up an interest in an award held by a company called CMS, approved by ICSID, for $133m plus interest.
Still sounds dull when you put it like that, so here’s the US government’s take in 2008 (via Wikileaks):
“Vulture fund” Blue Ridge belongs to a new class of financial market players who see ICSID claims against Argentina as just another attractive class of assets to be appropriately discounted and traded…
And it wasn’t about defaulted bonds, unlike other holdout stuff. CMS went to ICSID over the withdrawal of gas transport tariff rights from an Argentine venture in which it had a stake. It goes back to the country’s turn-of-the-century crisis but not the 2001 default. Although the Wikileaked cable suggests Blue Ridge once threatened to sell the award claim on to Elliott or some other…
Still, Argentina never paid the award because, well, it’s Argentina.
That didn’t stop Blue Ridge. They’ve been seeking to get the award confirmed in US courts, with Argentina objecting that it has sovereign immunity against having to pay under US law. (This is also shaping up to be its forlorn hope in the pari passu case.)
Most recently the Second Circuit disagreed with that idea: the fact Argentina signed up to the treaty behind ICSID counts as an “implied waiver” of immunity, and anyway there’s an “arbitral award exception” in US law. Not terribly exciting legal territory, but it’s probably a relief from parsing the vagaries of the pari passu clause, plus everyone and their mother bombarding the court over the implications for sovereign debt restructuring.
Even so, while Blue Ridge is on the cusp of getting confirmation, the case hasn’t even got to the question of enforcing the award (by executing on Argentine assets in the US). That’s the tough stuff in holdout litigation. And the case doesn’t involve bonds: it’s not NML. It’s not even Abaclat, another ICSID case, one that pits Argentina against Italian bondholders, and where there’s still no budging.
But…
Argentina’s still cracking on an important point though. It used to insist that any ICSID winners would have to slog through its own courts to litigate their award all over again. A bit like how it’s always insisted that the vultures who rejected its bond restructuring offers in the 2000s can go hang, or go accept another version of the same terms, much like it’s offering now. If you want to get paid, play by Argentina’s rules, often literally.
There is a shade of that even now, because Argentina’s bonds to pay off Blue Ridge and the others would be governed under its own law.
But, it’s still changing tack, and not least it sees an advantage in doing so. As Ambito reported, the quid pro quo seems to be that the US government would stop objecting to the World Bank lending to Argentina. In fact the government seems to be negotiating a $3bn World Bank loan currently.
Now, a lot of the outrage against Argentina on the holdout issue tends to be emotional. See Elliott, in the screeds put out by the American Task Force Argentina, which they help pay for. (If the regime’s evil, why even try to settle?) But other stuff’s coldly pragmatic. See also Elliott for that, this time in the form of suave comment by Jay Newman decrying how Argentina is losing out on market access.
Based on the ICSID developments, we wonder which argument might work more.
Meanwhile, there’s a couple of other points about holdout litigation (and settlement) in sovereign debt here.
1) There isn’t a bright line between litigation and negotiation.
You can read Newman’s FT op-ed to get a good sense of that, because it recounts contacts with senior Argentine officials from 2003 to 2011. But you can see it even in the Blue Ridge case, now that Argentina might be offering to settle: there was actually a “settlement in principle” on the table as early as 2009. It apparently didn’t last.
In fact the future might be more ‘litigotiation’, especially now that holdouts have powerful remedies like the pari passu clause, giving them a fighting chance of actually enforcing their bonds against a sovereign if it doesn’t negotiate a settlement.
For our money this makes the latest in the Grenada pari passu litigation, launched by the Taiwanese development bank (long story) in the shadow of the Argentina case, pretty interesting.
The Grenada case is on hold. According to this court order last month, “pending action by the International Monetary Fund may alter the financial position of Defendant Grenada and hasten a settlement of all issues in the case…”
Now, Grenada’s currently in restructuring talks with performing creditors, so the Export-Import Bank of the Republic of China’s just picked its timing pretty well. But it was also threatening some pretty advanced interpretations of how pari passu can be used to enforce debt. On some issues it recently lost, but others it was successfully pushing into what would have been the next phase of the case. More on this presently. But it looks like it was also creating a stronger position to make Grenada negotiate. Which brings us to the next point:
2) Settling for money vs fighting over the law.
This is a point made by Anna Gelpern — who noted that Elliott (through NML) “got really fabulous law out of the Second Circuit decision” which kicked off this whole saga last year.
Frankly the appeals court’s ruling in August, for all the fuss it caused, didn’t add much to Elliott’s achievement in securing a link between a breach of a bond’s pari passu clause and a remedy of ratable payment. They’ve tried to argue away the implications since by claiming Argentina’s breach was particularly egregious. In fairness, that is where the August ruling comes in: it agreed, and “uniquely recalcitrant” was the opinion’s phrase.
But it’s just possible that one reason Elliott should settle now is to bank all this law without Argentina (however improbably) successfully overturning it in a legal setting later on. The actual way the implications of NML v Argentina will be widened or narrowed will be in a US court of law, through another set of sovereign debt litigation, not by dint of whatever Paul Singer thinks (or what we think, for that matter).
The Grenada case is actually quite similar. Up until its pause, it was not narrowing the pari passu precedent, as NML tried to argue to the Supreme Court recently over the Argentina litigation’s effects on sovereign restructuring policy. In a recent court opinion, Ex-Im Bank did fail to get its bid for a ratable payment order accelerated via what’s called ‘partial judgment’, and, crucially, because it couldn’t immediately show Grenada was as recalcitrant about not paying debt as Argentina has been.
However, Ex-Im Bank also won a major point of precedent, because it was allowed to go on pressing a pari passu claim despite being a judgment creditor. (There’s much more detail on the background to this, here.) Because of that, Ex-Im Bank’s course of action until the pause came along would then have been to provide more evidence Grenada was a bad debtor deserving of having to pay holdouts ratably. It might well have lost at that.
But we might never know. Grenada might pay off Ex-Im Bank now, dropping the case, but not that legal advance of creditors at least being able to claim pari passu violation long after they won judgment against an actual default. It’s only one principle but it’s an important one, especially for negotiating to get more than what a sovereign restructuring might offer: the judgment creditor’s position is usually pretty hopeless at being able to enforce debt. Not so once pari passu joins the mix.
And so this is why a settlement with NML would be different to what’s going on with ICSID. Argentina’s change of direction there offers hope that we can all move along. But then, we could be settling some big changes in sovereign debt law along with it.
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