Elliott corners Argentina as payment workarounds fall short of avoiding third party injunction Story:

14:51 Elliott corners Argentina as payment workarounds fall short of avoiding third party injunction
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The Republic of Argentina’s pari passu saga will gain traction next week as it heads to court with plaintiff holdouts led by Elliott Management. In the last three months investors and lawyers have pored over hundreds of legal documents in hope of finding loopholes and creative ways to allow Argentina to remain good on its restructured debt while simultaneously refusing to pay holdouts. Yet with the injunction on payments routed through third parties intact, the sovereign’s chances of escape look limited at best unless the US Supreme Court reverses the order, according to lawyers, buysiders and strategists.

The effect on third parties including the trustee of the restructured bonds and the clearing system is fundamental to NML’s case. Only once the Court of Appeals (AC) decides on whether it agrees will NML and other plaintiffs be able to assess whether their strategy has worked. Since the end of November when the AC granted a stay on the order by the Second Circuit Court, lawyers and investors have been scrambling for ideas and legal loopholes that would allow Argentina to service its Exchange bonds while simultaneously remaining in default on holdouts in case the order on third parties and intermediaries is not reversed. “We have been thinking long and hard about what Argentina could do to avoid paying holdouts but have a strategy in place to preempt this,” said a source close to the litigants.

One possible workaround, also known as the “Check's in the Mail” defence, involves Argentina sending a cheque directly to Cede & Co skipping the trustee, Bank of New York (BNY) in the payment chain. Sending a cheque is in line with the indenture but the problem is that as a DTC nominee and registered holder of all Argentina bonds, Cede & Co would be in violation of the injunction if it then sends the cheque on to registered bondholders because every link in the payment chain is subject to the injunction, note lawyers.

With Cede holding the property of funds on behalf of bondholders even if no transfer is made to DTC, its possession means that Argentina has extinguished its obligation de jure and technically a default has been avoided, a strategist pointed out. Still, the cheque is uncashed and one way or another with the payment route recited by the court Argentina is cornered.

“Argentina is not going to be comfortable leaving funds in limbo at Cede & Co and it is not an effective way for bondholders to get paid. The other option is to change the indenture Trustee which can be done unilaterally but can be objected to. It would take time and you really do need that bondholder registry,” said the strategist.

Euro Exchange holders are also unlikely to be shielded from the injunction that remains intact. Euro bondholders receive payments through BNY Luxembourg and Euroclear. But Argentina first transfers bond payments to BNY in New York and then onwards to its local account in Luxembourg. Also while the payment route recited by Judge Griesa applies only to monies due on bonds governed by New York law, the injunction binds BNY Luxembourg, BNY London and Euroclear Bank among others implying bondholders of Euro notes are unlikely to escape unscathed.

“The injunction is pretty clear on this. And Euroclear has an office here in Manhattan so they would be enjoined anyway,” said a second lawyer.

The only feasible payment route Argentina has is to offer to pay coupons to bondholders into a new offshore trust. This would probably require the Republic to carry out an exchange with its restructured bondholders as payments into the Trust in New York are virtually “hard-wired”, noted the strategist. And while Argentina could argue that full payment in USD in Argentina is of greater value than the risk of payments being pro-rata in New York, the new legislation (Argentine law) is unlikely to appease investors, he added.

“Setting up this system would take a very long time. Argentina would need all the information to actually verify that they are the beneficiary owners of Cede & Co. Third parties would be seen as acting ‘in active concert or participation with the Republic’ and labeled in contempt. It really is not that easy to do,” said a second lawyer. The injunction also specifically prohibits the Republic from amending its process or transfer mechanisms by which it makes payments to Exchange bondholders. At this stage Argentina would be in violation of all the other orders in the injunction and is already ignoring numerous US court orders so it won’t be deterred from adding another to the list.

The bonds which Argentina defaulted on in 2001 were issued pursuant to a Fiscal Agency Agreement (FAA). An FAA leaves debtors very vulnerable during events of distress owing to the existence of the pari passu clause which holdouts argue Exchange bondholders were very well aware of when they tendered their bonds in 2005 and 2010. In 2003 and 2004 Judge Griesa warned everyone of what the clause meant and the prospectuses of the exchange bonds cautioned that FAA bondholders could attempt to interfere with their payments.

Plaintiffs point out that the impact of the injunction is not particularly damaging for the working and functioning of financial markets. This will be the focal point of attention at the hearing next week as the issue of the pari passu clause has been largely decided as no dispute has been advanced. “It is in no way an undue burden for them as payments are made only several times a year and the notice is coming well in advance,” said a source close to the case. “They argue it will fundamentally disrupt the payment system but this is exaggerated. BNY and the DTC will be able to carry out their ordinary function but will be prevented from making payments to the Exchange holders.”

The options for Argentina look very limited with the scoreboard favouring the group of holdouts led by Elliott Management. Argentina has submitted a petition for a rehearing en banc – by all judges of the Court of Appeals for the Second Circuit rather than just the three that have dealt with it so far - but the chances of this are low. The Republic has also stated it will appeal to the US Supreme Court if necessary. However, it is extremely unlikely the Supreme Court would take the case as the pari passu is a matter of state, not federal law, and the US Supreme Court usually refuses cases where a state law is involved. In order to get the Court to look at this matter, Argentina would have to stress that the ruling affects the concept of sovereign immunity.

Griesa’s order requires Argentina to make a “ratable payment” to the plaintiffs totaling USD 1.33bn. This figure includes unpaid principal, the due date of which has been accelerated and accrued interest. While this is economically feasible and accounts for just 3% of Argentina’s reserves, if claims from untendered debt were to be made similar to Elliott’s the country’s liabilities could inflate to around USD 11bn (27% of reserves). This is made up of EUR 6.4bn of unmatured debt excluding past due interest since 2001 across US Dollar and Euro bonds. Argentina cited in its brief that the figure could rise to EUR 43bn should holdouts win the litigation. This includes all the holdout claims and the restructured claims that they say would have the right to demand the same equal treatment as litigating holdouts under the Rights Upon Future Offers (RUFO) clause.

The sovereign is willing to make concessions and give plaintiffs the same treatment as those who participated in the 2010 debt exchange, according to its brief. The trouble is the plaintiffs are unlikely to settle for the deal as tendered creditors received after years of expensive litigation. “It has been extraordinarily expensive and I would be surprised if litigants would settle for anything less than what Griesa has awarded them. They [the holdouts] have not been approached from the Argentine government.”

The timing of the decision is uncertain. It could take several weeks to several months after the hearing next week (27 February) as the US justice system does not rule by a preset schedule or deadline. The 26 October decision from the AC came three months after the hearing and is the most reasonable guess of when a decision could be made.

by Christopher de Vrieze
Source: Debtwire