DB: Argentina: Court filings - constructive update

While we await the February 27
th
 hearing, various parties have been filing
their briefs over the past two weeks, providing enough information for
further discussion on this critical legal issue affecting Argentina's
restructured bonds. Of all the filings, three appear the most noteworthy: 1)
the one from the Republic, offering a reopening of the 2010 restructuring as a
definite solution to the litigation,  2) the one from the United States as
Amicus Curiae, noting the district court’s incorrect interpretation of pari
passu (also adverse to US interests) and its contravention to Foreign
Sovereign Immunities Act (FSIA) , and 3) the one from the Exchange Bond
Holders Group, demanding certification of the questions under dispute by
the New York State’s Court of Appeal. In our view all of these positions are
supportive of restructured bonds  in one way or the other. This
notwithstanding, the final word will be that of the Court.
The presentation from Argentina was hardly a surprise, concluding that “The
Amended Injunctions have no basis in law, are inequitable, and threaten to wreak
havoc on countless innocent third parties, which have already suffered losses due
to the plunge in their bonds’ value provoked by the insecurity that the Amended
Injunctions have created in the market  for Argentina’s New York law-governed
bonds. This harm to private and sovereign creditors, as well as to New York law
and New York as a place to do business, will only grow if the Amended Injunctions
are affirmed. The district court was wrong to ignore the chorus of voices against
the entry of the Amended Injunctions; the Amended Injunctions must be vacated
in full.“  However the filing does have a clever discussion about the ratable
payment formula used by the District court as the antithesis of equal treatment or
the desired request for pari passu. It also has a strong statement regarding the
violation of FSIA. But more importantly, it reiterates that the Executive is prepared
to send to Congress a proposal to put an end to the litigation by offering the
plaintiffs the conditions  under the 2010’s restructuring deal. Unfortunately that
decision is not pro-active, as it seems contingent to the court ruling. Nevertheless,
it represents a confirmation of the progress made in December when Argentina
first recognized the remaining rights of holdouts, a critical change in the
government position in our view (as  discussed in our note of November 27
Argentina: Time to Compromise?).



The United States Amicus Curiae brief probably represents the Republic's strongest
endorsement.  First, it indicates that the existing  panel's interpretation of the pari passu
clause is incorrect and is adverse to the interests of the United States. It states "The panel in
this case adopted a novel interpretation of a  standard pari passu clause found in many
sovereign debt instruments, in a manner that runs counter to long-standing U.S. efforts to
promote orderly restructuring of sovereign debt....The settled understanding of pari passu
clauses is that selective repayment does not violate the clause, even if it is the result of
sovereign policy". Furthermore, the filing also challenges the District Court's argument that
the prevalence since 2005 of collective action clauses in bonds governed by New York law
will eliminate any threat to orderly sovereign debt restructuring.
Second, the US brief also questions that the injunction contravenes the FSIA and may harm
US foreign relations and threaten US government assets.  It says that "by unduly restricting
the immunity afforded to foreign state property, the decision not only contradicts this Court’s
precedent, but could adversely affect U.S. foreign relations and threaten U.S. government
assets". The filing suggests that the "injunction affirmed by the panel constrains Argentina’s
use and disposition of sovereign property that is immune from execution. That result
improperly circumvents the careful limits on execution established by Congress". Specifically,
it illustrates that by being required to pay both the exchange bondholders and the holdouts,
"Argentina would be compelled to use sovereign funds in a particular way...or is constrained
in its use of funds with which it would pay the exchange bondholders".
Third, the filing by the United States explicitly supports Argentina’s petition for rehearing en
banc.
As commented, the most notable point in the Exchange Bondholder Group's filing is
the request for certification of the questions (interpretation of pari passu and the meaning
of ratable payment) to the New York State's Court of Appeals, in the event that the Circuit
concludes there is a controlling question of the state law. This could open the door for a new
interpretation of what is possible and what questionable under the law (as we also discussed
in our October 26 piece "Another Holdout Victory, Yet Hard to Enforce"). Furthermore, if that
application is permitted, the procedure could take several months, according to our outside
legal counsel. Under that scenario, it will be highly unlikely for a ruling to be obtained by the
end of February. Note that this supports lower premium in the 0M CDS maturing on March
20th and also (to a lesser extent) the 3M CDS maturing on June 20th.
All in all, the situation remains fluid. While we believe the overall situation is in favor of the
Republic this remains a binary event. Credit spreads have recovered substantially following
the Appeals Court decision in December and will likely continue to trade within a narrow
range until the end of February, in our opinion.

2 January 2013  Data Flash (Emerging Markets)