Paraguay, which just debuted with its first international bond, went even to the extreme of plastering it into the prospectus for the emission, where it warns its potential investors about the case of NML v. Argentina. “Recent rulings in New York court are creating uncertainty about the meaning of the equal treatment clause and could reduce or impair the capacity of sovereign emitters to restructure their debt,”

 

El Cronista

Holdout risk: new bond emissions already contain warnings about the ‘Argentine case’

 

Thursday, February 21, 2013

 

By Laura Garcia

 

Any country that issues debt – and faces the discomfort but always concrete eventuality of not being able to pay – these days embraces a modest ambition: to not turn out like Argentina.  The monumental swap that the country orchestrated and the convoluted and media-driven battle that followed – today on everyone’s lips in front of a possible pro-vulture ruling – puts many emitters on guard to not be the targets of a holdout attack “a la Argentina.”

 

Paraguay, which just debuted with its first international bond, went even to the extreme of plastering it into the prospectus for the emission, where it warns its potential investors about the case of NML v. Argentina.  “Recent rulings in New York court are creating uncertainty about the meaning of the equal treatment clause and could reduce or impair the capacity of sovereign emitters to restructure their debt,” it says.  “We cannot predetermine when nor in what form the final decision of the appeal will take.  Depending on its reach, the ruling could complicate or impede future sovereign debt restructurings and the handling of debt in distress by which emitters obtain the required consent from bondholders in accord with collective action clauses, as these bonds contain,” it says.

 

Almost like a shadow of a bad omen, the same warning is repeated in other recent emissions.  Such with Mexico, with the reopening of the bond expiring in 2044 and the placement by Colombia of a warrant coming due in 2023, both under New York jurisdiction.  The reserves that Paraguay and Mexico hold have again become justified in light of another fact: they share as a legal advisor the same law firm that is defending Argentina: Cleary Gottlieb.  A curiosity: despite the repairs they show, all the contracts repeat without any modification the same pari passu formula that left Argentina to the mercy of the vultures.

 

Europe wants to immunize itself

 

But not only in Latin American are there signs of discomfort around the Argentine case.  In fact, in Europe they are already debating how to immunize themselves from an assault of unruly bondholders.  Above all with the fragile situation of Cyprus, which just held elections and is anxiously awaiting a rescue.

 

The proposal is coming with the flourishes of two restructuring gurus: Mitu Gulati, professor at Duke University School of Law, and Lee Buchheit, star attorney at Cleary Gottlieb. Yes, the same duo that came up with the model for the Greek swap and which is now suggesting changing the European treaty that created the rescue fund (European Stability Mechanism) to protect the countries that have to restructure from attachment of assets.  Something like that to cover themselves from a “Frigate effect.”

 

In a paper that was co-signed with Ignacio Tirado, of Madrid Autonomous University, and which they presented a few days ago at a conference in Cyprus, they explain that Greece counted on an advantage that others don’t share: 93% of its bonds were government by domestic law, which allowed an amendment to be inserted retroactively – something unprecedented until now – for collective action clauses to minimize the holdout problem.  In the end, some 6 billion euros in the hands of bondholders fell outside it, most of whom already received the total they demanded.  “It was simpler than defaulting and facing lawsuits.  Nobody is anxious to bring Argentina into the heart of Europe,” said Buchheit.

 

A similar agreement was implemented in Iraq in 2003 when the UN Security Council approved a resolution that prevented the attachment of the country’s oil assets.  It even protected sales revenues of crude and the bank accounts that these flows were sent into.  Thus, Iraq negotiated a nominal haircut of 80% on a stock that had reached US$140 billion in the Hussein era.  The agreement with the Paris Club was followed by a swap of US$21 billion with private bondholders.  There were almost no holdouts.

 

The idea of modifying the European treaty to avoid attachments also revisits most of the premises of the scheme proposed in 2002 by the IMF (Sovereign Debt Restructuring Mechanism), a kind of voluntary Chapter 11 for countries that emulate the regime of the corporate world and which seek to guarantee a certain order in the midst of a bankruptcy.  An idea that capsized at the time from the opposition of the United States.

 

Default is never agreeable.  Perhaps it also cannot be truly orderly.  But just as Argentina looks with horror into the Venezuelan mirror, many emitters today see in the holdout nightmare the country is facing the confirmation that sovereign defaults need rules.  And they need, above all, a formula to scare off the vultures.