El Cronista Pari passu: in search of the lost clause that the vultures fly over

Debt Coverage:

Financial Times: “Guest post: Time to ratchet up the pressure on Argentina” (GLASSMAN)

La Nacion: “The government rejects the request of the vulture funds”

El Cronista: “Debt: the government rejects the proposal of the vulture funds in the US”

El Cronista: “Bondholders now ask that the vulture deposit bond of US $2 billion”

Ambito Financiero: “Government waits for new support from the Federal Reserve before vulture fund”

El Cronista: “pari passu: in search of the lost clause that the vultures fly over”

Financial Times
Guest post: Time to ratchet up the pressure on Argentina<http://blogs.ft.com/beyond-brics/2012/12/04/guest-post-time-to-ratchet-up-the-pressure-on-argentina/#axzz2E5ehohBR>

Tuesday, December 04, 2012

By James K. Glassman

As the global economy continues its sputtering recovery, policymakers have an opportunity to take a strong stand on principles that may help mitigate further long-term damage. In particular, as regards Argentina, a relatively small country with a potentially large impact on the international financial system.

For a decade, responsible nations have watched impassively as Argentina has refused to abide by court decisions and flouted global financial norms.

Now, with Argentina facing critical deadlines, some of those nations are acting – but not forcefully enough. The reason there’s been any response at all is a concern that other indebted nations – perhaps Greece or another weak southern European economy – may follow Argentina’s dangerous example.


La Nacion
The government rejects the request of the vulture funds

Tuesday, December 04, 2012

WASHINGTON (From our correspondent).- The government yesterday added to the chorus of those asking American courts to reject the attempts by the so-called vulture funds, in the direction of demanding that Argentina make a deposit of “no less” than US$250 million before Monday as a “guarantee” that it is ready to abide by what it decides.  “The request from those funds is inadmissible and has no basis whatsoever,” argued the government’s brief.  In fact, the recourse adds to those already filed, equally, by the bondholders that did accept the debt swap.

"Argentina is making its payments to bondholders that did accept the swap in a normal manner, having just done so with those who expected it on the 2nd and will continue to do so until 2038,” it promises.

The brief is a response to the new demand for an escrow deposit led by the funds NML Capital and Aurelius Capital, the same ones that already achieved the attachment of the Frigate Libertad.  According to Eugenio Bruno, attorney from the Garrido Firm, “Argentina has filed a brief with good procedural grounds, on sovereign immunity and on the underlying issue.”

What is expected now is that the appeals court decide before Monday.  From there the possibility could arise that Argentina would be obliged to formalize a deposit or not.  The other option is that, also by request of the holdouts, it opt for the unlikely path of reducing the deadline fixed for new procedures and testimony, and that, in the facts, establishes a pause until the end of February.


El Cronista
Debt: the government rejects the proposal of the vulture funds in the US

Tuesday, December 04, 2012

By Esteban Rafele

The succession of briefs in the courts of New York between the “vulture” funds and Argentina doesn’t cease: yesterday, the government asked the Court of Appeals to deny the request of the litigants, who’d asked that the country create an escrow account for US$250 million, official sources report.

The bondholders that entered the exchange also asked the higher court in New York to reject the proposal from NML Capital, the Elliott fund, property of Paul Singer.  A group of investment funds with restructured debt had asked the court to be considered as interested third parties in the lawsuit and, after the refusal of the lower court judge, Thomas Griesa, were accepted.  On that, yesterday at the last minute Bank of New York, the trustee for the swaps, asked to be counted in as an interested party.

The government, sponsored by the law firm Cleary Gottlieb Steen & Hamilton, appealed the same arguments with those that it used to ask the Court of Appeals to for the “stay” to reject the complaint of the plaintiffs.  “The orders would restrict the rights of appeal while requiring the Republic to take steps in violation of the (U.S.) law of sovereign immunity and the internal laws and policies of the Republic,” replied the executive in its brief.  According to its view, the US$250 million deposit would have the same effect that the obligation to guarantee the US$1.33 billion that Griesa had asked for in the lower court.

The Court of Appeals delayed last week the order from Griesa to deposit that amount of money in an escrow account before the payment of the GDP Coupon, for US$3.5 billion, on the 15th.  The judge had compromised the payment agents to not send the money for the restructured debt before that fund would be constituted.  The court delayed that decision for at least three months and saved the debt payment for December.

The court will have to resolve these days if it sides with NML Elliott’s appeal or not, something the government is ruling out. Then will begin the schedule of filings set by the court.  On the 28th, Argentina has to present its arguments.  On January 4 it will be done by the interest parties (the bondholders and, if it is considered as such, the Bank of New York).  Then it will be the turn of the vulture funds.  On February 27, the court called a hearing.  That is the new key date, as understood by the inner circle of Economy Minister Hernan Lorenzino.


El Cronista
Bondholders now ask that the vulture deposit bond of US $2 billion

Tuesday, December 04, 2012

By Laura Garcia

The attorneys for the bondholders from the exchange went back to work all weekend.  And in this ongoing war of motions, yesterday they made their filing to answer the arguments used by the vulture funds only a couple of days ago.  The plaintiffs had requested that the timetable be sped up from the previous schedule, which is extended now until the end of February, and which demands that Argentina make a deposit of at least US$250 million in escrow.  Basically, the creditors that accepted the exchange, led by the fund Gramercy, asked the Court of Appeals to reject that request, calling the demand “illusory,” “desperate” and even “speculative.”  But what is curious is that, at the same time of rejecting the idea of a bond, they asked that in the case it is decided that a deposit is demanded of Argentina, the vultures also constitute one in favor of the bondholders.

Of course, that is not an optimistic scenario.  But the bondholder from the swap also cut to a somewhat strange request: “In the unlikely case that this court finds it necessary to require the constitution of an escrow fund by the Republic, then it should also demand that NML make a deposit in view of protecting the bondholders of the exchange from the losses that without a doubt they will suffer in case the Republic refuses to set up the escrow, the stay on the ruling is lifted and the bondholder do not receive their money.”

“The court required that NML provide an adequate guarantee in the sum of approximately of US$2 billion to protect the bondholders against the devastating losses that would certainly be incurred if the country refuses to pay the bond and the court lifts the stay,” they insist further on.

El Cronista asked for more details from Gramercy’s attorney, Sean O’Shea, who explained the motion in the following terms: “If the court comes to ask Argentina to make a deposit, a very unlikely outcome, we argue that the plaintiffs should also make a deposit to compensate the bondholders for the losses they will suffer if the court comes to rule against them.  Why?  Because the law allows it and we cite cases in which other courts have ordered it.  The most likely outcomes, however, is that the motion by the plaintiffs is rejected and no escrow is demanded.”

The bondholders, who were admitted into the appeal process, also said that there is no real risk that Argentina intends to evade the order to pay and that the vulture funds “only support themselves in groundless speculations from the press that they themselves could have fed.  They are arguing that, if the Republic doesn’t specifically deny every false report, then they must be true,” they said.


Ambito Financiero
Government waits for new support from the Federal Resrve before vulture fund

Tuesday, December 04, 2012

By Carlos Burgueno

The government is waiting for new in the coming days from the Court of Appeals.  According to information that arrived in Buenos Aires from the firm of Cleary, Gottlieb, Steen & Hamilton, the Federal Reserve of New York is at the point of filing a brief again in the courtroom in favor of Argentina.  In it, it will say that the country has made a great effort these years to restructure its debt and that it supports the decision of the government of Cristina de Kirchner to offer an eventual third reopening of the exchange to renegotiate with the creditors.  The Fed will mention also that the success of the Argentine process is important for other eventual debt restructurings.

It is also not the only support that will appeal at the Court of Appeals in New York.  According to lawyers that are representing Argentina, the Bank of New York Mellon also will present a brief in favor.  In this case it’s treated as something expected: this entity is the one that must receive the transfers from Argentina to pay the debt maturities, including the US$3.5 billion that the country must pay on December 15.  Also filing will be the compensatory chambers (DTC).

All these briefs that back the government’s position could be received by the court to allow for the possibility of receiving as parties all those that are felt affected by the process of debt restructuring, including also the exchange bondholders.  This alternative has been rejected by Griesa in the lower court, where every request was signed with replies of “denied” without explanation.

Yesterday the government dismissed the appeal filed on Friday by the vulture fund NML Capital saying that it could bring problems.  According to what Finance Secretary Adrian Cosentino said, “the filing doesn’t surprise us.  It’s a formal process, but for us it doesn’t add arguments that allow one to expect a reversal of the ruling recently issued by the court, of which we highlight that there has been a fixed schedule granted which gives a deadline to follow in the Argentine legal strategy.”

The Elliott fund had asked that the schedule of hearings be sped up before December 15, such time when the GDP coupons attached will be paid, which total, between pesos and dollars, some US$3.5 billion, the biggest payout of the year.  Also, it asked that Argentina deposit a guarantee of US$250 million.  Until yesterday there was no support for Elliott from Aurelius, nor ACP Master, nor the Olifant Fund, other funds that entered the Griesa lawsuit.  Equally, and by recommendation of the firm Cleary, Gottlieb, Steen & Hamilton, Argentina filed a brief before the court answering Elliott’s position and the court’s response is expected today.


El Cronista
Pari passu: in search of the lost clause that the vultures fly over

Tuesday, December 04, 2012

By Laura Garacia

Three professors of erudite law. An almost archaeological search. Hundreds of hours spent deciphering financial files. A spirit of Indiana Jones in search of the lost clause. And a relic: the first antecedent of “pari passu” in history. And the first traces of the low-flying vultures circling above their prey.

The find dates from 1871 and places us unexpectedly in Bolivia, where a financial contract includes for the first time the famous “pari passu” (at the same step), a vague and blurred clause which ensures all bondholders receive equal treatment and which now has Argentina against the ropes in the New York courts.

The protagonist of the story is a little-known yet colorful figure called George E. Church, an American colonel with a dream: a communications system that would connect Bolivia to the ocean. Church issued a bond to collect funds, but his plan was a fiasco and the investors demanded he return any money left over. This happened two centuries ago but the rhetoric is nearly the same: “an unscrupulous group of commercial pirates purchased bonds with a discount, hoping for vast returns through litigation” read the headlines at the time, according to the professors.

Excited over this clue to the genealogy of pari passu, Mark Weidemaier, Robert Scott and Mitu Gulati, from the universities of North Carolina, Columbia y Duke, respectively, took their find to the pragmatic world of the lawyers. Their excitement was not shared:

“It’s very interesting to see that you academics can afford the luxury of dedicating your time to this kind of matter”, was the answer, they admit with a touch of humor in their paper “Myths of origin, contracts and the search for pari passu.”

One contract, three and half minutes

In all cases, the clause has lasted in the routine jargon of contracts as an arcane gesture of little consequence. “For over one hundred years, creditors found it virtually impossible to sue a sovereign nation  successfully for its failure to meet its obligations. •Elliott  Associates tried to change the traditional rules of the game. And in September 2000 in Brussels, that is exactly what they achieved”, explain Mitu Gulati and Robert Scott, in the introduction to their book “The Three and a Half Minute Transaction.”

No-one would have betted on the chances of Elliott, the vulture fund today stalking Argentina and which at one time had the financial intermediary used by Peru to pay its new Brady bonds in its sights.

But a series of unexpected events overturned all probability: an obscure commercial court unfamiliar with sovereign debt litigation, a corruption scandal which involved the then president of Peru, and the discovery of a contractual provision whose meaning no-one seemed to understand: “Pari passu”.

“One would believe that a clause of this cut, which today is part of nearly all sovereign debt contracts, would be one of the best understood terms in the jargon. However, almost no-one understood it. And essentially, the parties included is as an ornament”, say the experts.

Until then, in the clouds surrounding the clause, the most accepted interpretation was that of an insurance against the involuntary subordination”. This means a way of avoiding the debt issuer prioritizing the collection of the debt by new creditors (and from this point of view, the Lockout Law, which forbids the reopening of the swap, does violate the clause, according to the consensus.

But everything changed with the extreme interpretation proposed by Elliott: an inter-creditor agreement according to which, any payment made by the sovereign should be paid out in equal terms. The legal world rose up in indignation before a heretical and destabilizing interpretation. If anything, pari passu did not mean that a creditor who accepted the swap would not be able to collect unless all those who rejected the agreement did so too.

But here comes what has the academic world in a state of shock: “Ten years later, nearly all sovereign debt clauses still contain this clause, usually included in the first page of the sales prospectus, and essentially nothing has changed either in form or language with regard to the Brussels case”.

Gulati and Scott ask themselves: “How is it that sophisticated and highly-paid lawyers, working in the world’s most elite firms, have never managed to alter a contractual terms that not only represents a risk of litigiousness for their client but that also nobody has managed to understand? Hence the name of their book: three and a half minutes, which is as long as it takes to produce this contract model, nothing more than a cut and paste effort of previous documents.

Until a few months ago, the question which had captivated these professors might have seemed quite innocuous or irrelevant for an Argentina sunk in the mires of currency restrictions and inflation. But the latest round with the holdouts has left it fizzling in the center of a legal battle which revisits the arguments dusted off by Elliott ten years ago.

Anna Gelpern, a well-known expert in these issues from American University, insists on the caution displayed by the Court in covering itself as regards what might be called an “interpretation pulled out of a hat”. Hence Griesa’s comment that “what we are doing here is not literally to ensure that pari passu be complied with as would be the case in normal commercial circumstances, but to provide a remedy for the violation of the clause carried out by Argentina.” At all events, the professor believes that “the judge gives the impression of a man finally able to get his hands on Al Capone who has no intention of letting go”.

Anti pari passu armoring

Suits such as that lodged by Elliott have the potential to magnify the attractive side of the holdout strategy and even go so far as to threaten the viability of future restructurings.

Over the last few years, sovereigns issuing debt have sought to armor themselves against this risk with the so-called “collective action clauses (CAC)” a mechanism introduced for the first time by Mexico in 2003, rapidly adopted in all issuances governed by the New York laws. Basically, instead of putting the swap in the hands of the goodwill of individual bondholders, it is established that if 75% is in agreement, they should all accept.

But Stephen Choi, professor at New York University, hired by Gramercy to defend the position of the swap bondholders before the judge has reservations. Of a total of 275 sovereign issues under New York law due in 2013 or later (with the exception of Argentina) 182 or 74.7% contain this kind of clause. This implies that there are still 65 issues for a value of USD 45.800 million (at the moment of placement) which do not have the CAC armor in place.

At all events, North American justice already ruled that Argentina has violated “pari passu” and today all that remains is to discuss the “remedy” that will be offered to the plaintiffs (and expect that the Appellate Court will review the 100% which an angry Griesa ordered to be paid to the vultures).

It may have been an aberrant interpretation of an overly ambiguous clause.

Maybe the lawyers should have eradicated it from the contracts over a year ago. But here we are. The holdouts pressing their case in New York have not yet given up. They are two little Latin words. And some 7,500 million dollars at stake.