Vulture funds: Argentina maintains its posture and insists on reopening the swap

 

El Cronista

Vulture funds: Argentina maintains its posture and insists on reopening the swap

The government reinforces its strategy, despite the bondholders having already rejected the offer.  The Economy Ministry bets on the support of the United States and the global financial system

 

Friday, February 01, 2013

 

By Esteban Rafele

 

The government has time until late tonight to respond before the Court of Appeals for the Second District (sic) of New York to the filings that the funds that are suing Argentina made last week in that court, in which they insisted on collecting 100% of their debt in default and rejected entering into an eventual swap.

 

It will be the last filing that the country will make before the hearing of February 27, the last step set by the New York court before issuing its sentence.

 

Argentina’s filing will insist on the possibility of reopening the debt restructuring on the terms of the offer of 2010 if the Court of Appeals so dictates.  That was the main argument of the brief that the country delivered to the court when appealing the decision of the lower court judge, Thomas Griesa, who had ordered the payment of the entire debt in default in one payment, as demanded by the fund NML Capital, of Elliott, for US$1.33 billion.  The court suspended the ruling from Griesa at the end of November and established a schedule of presentations until the hearing on the 27th of this month.

 

Early last Saturday morning, the funds NML and Aurelius attacked Argentina’s arguments point by point.

 

In the first place, they rejected the possibility of entering the exchange because their bonds do not have collective action clauses which oblige a minority to accept a restructuring validated by a majority of the creditors.  They also refuted that a sentence in their favor would open up a wave of lawsuits against the country, because, they said, those who accepted the swaps did so knowing that they could continue litigating.  They rejected that such a possible ruling would provoke an earthquake in the international financial system because, precisely, the bond issued in the last ten years contain that kind of clause, which impedes in practice lawsuits of that kind.

 

They also refuted that Bank of New York and the compensatory houses that participate in the payment of restructured debt would be mere intermediaries, as trustees.  And that the money that Argentina pays would be property of those that restructured their debts, as the cash would not have arrived yet to them if the judge orders the diverting of the payments into the coffers of the holdouts.

 

And, above all, they remarked that Argentina still has not made a payment proposal.  According to the holdouts, an eventual reopening of the exchange doesn’t satisfy the ruling from the same Court of Appeals that now must define the ruling of October 26.  In that ruling, the court upheld the theory of pari passu or equal treatment of the vulture funds, who say they’ve been discriminated against by the country.  And ordered the country to pay.  It gave two alternatives (which the government understands are not exclusive): a cash payment of 100% or prorated payments with the coming maturities of restructured debt.

 

Economy Minister Hernan Lorenzino, Finance Secretary Adrian Cosentino and the law firm advising the country in the United States, Cleary Gottlieb Steen & Hamilton, will be working up to the last minute today on these points and in strict secrecy.  The filing will be scrutinized up and down by Legal and Technical Secretary Carlos Zannini and by President Cristina Fernandez.

 

Argentina will insist on its proposal to reopen the exchange if it is what the Court wants to do.  And it will be supported with insistence in the briefs filed by the United States, the clearing houses and banks and even Anne Krueger, the former second in charge of the IMF, who warned that a ruling against the country could have consequences in the global financial system.

 

 

Ambito Financiero

Vulture funds: playing the last card before the hearing

Argentina is today presenting a reply at the New York Court in response to the accusations made by Elliot y Aurelius

 

Friday, February 01, 2013

 

By Eugenio A. Bruno, Attorney

 

Argentina must today present its final argument before the audience of February 27, without prejudice to the fact that it always has a fallback option to draw up presentations or subsequent briefs, particularly those with a high impact if necessary to reach this hearing in a solid position. Obviously this is the main objective, even when there are still pending the instances of the appeal before the U.S. Supreme Court.

 

• Reserves and me-toos

 

The discussion over the reserves has become an essential issue inasmuch as this is not only about possibly having to pay as a result of a sentence favorable to Elliot, Aurelius and the other investor funds in the current case. This is also about the fact that behind such a payment would appear the “me toos” which would immediately present themselves using the same arguments and aspiring to collect under the same conditions. In this sense, the amount of capital in default under New York Law is approximately US$4.3 billion, which must be multiplied by three given the sum of accrued interest since the declaration of default in December 2001, which means over US$ 12 billion, without including the claims filed in Europe and Japan, where the possibilities of legal collection are virtually non-existent. Clearly this is a sum which cannot be paid, given the state of Argentina’s finances, which takes this debate onto a level which is not only about the will to pay but the capacity to pay.

 

This point will be mentioned in the presentation with a view to refuting the key phrase in the brief presented by the speculative funds where they said that it would be incredible for Argentina to enter into default by not paying US$ 1.4 billion when it has reserves for over US$40 billion.

 

At all events, the lack of capability to pay has not always been welcome by the New York courts, which have even rejected statements of this type from countries such as Congo and Jamaica. But what is certain is that this issue is under discussion both at the level of Thomas Griesa’s court as well as the Appellate Court and hence changes in jurisprudence cannot be discarded although this is not a simple case.

 

• Payment formula

 

The minority plaintiff funds and investors have argued perhaps justifiably, that the only thing under discussion in these legal instances are the determination of the payment formula and the application of cautionary measures concerning the payment embargo on the Bank of New York and other payment agencies. And in this sense they presented a payment formula contained in the (impactful) resolution passed by Griesa on November 21 while Argentina has not presented any (sic).

 

In fact, the government has not done so as it argues that the interpretation made of the pari passu clause (which leads to the payment formula) by Griesa and the Court is mistaken and that Argentina has not violated the clause.

 

As Argentina has said, supported by the US government, the pari passu clause is a boilerplate or common norm always understood as the way in which one debtor is forbidden from creating priority debt over another debt which originally had the same legal status in terms of non-subordination, but never in terms of equal payment in the sense of having to honor two debts at the same time. Then Argentina also said that the lock law does not violate the traditional interpretation as it does not imply a subordination of legal status concerning the debt in default. Here, obviously, the question is if this is enough to avoid having to present a new payment formula. And If the government does not think so, if they were to present a payment formula based on the 2010 swap, for example, and if this is sufficient for the Court to accept it, as the imposition of a forced swap implies compulsory haircuts, something which is not consistent with New York laws, unless this be under the recourse of equality which will be discussed in greater detail below.

 

• Defense of a trust fund

 

This would be the key point of the Argentine defense given that it is alleged that there is a trust fund which protects payment and that this structure must be respected by the courts.

 

This is so as the payments to holders of swapped bonds take place in Argentina, in an account of the Bank of New York at the Central Bank, with the BNY acting as a trust fund for these bondholders, which means that under this set–up, when funds are deposited in this account, they are no longer Argentine state property but are held in trust for the benefit of the bondholders (holders of swapped bonds). Hence they cannot be attached as Argentine debt, alleges the government.

 

• Protection offered by the laws of immunity

 

The main argument is that Argentina cannot make the deposit in an escrow account as requested by the vulture funds as this violates the Sovereign Immunity Law of the US which protects non-commercial assets and which specifically forbids assets not of this kind to be attached. And the argument is that the payment which Argentina should make would come out of its reserves and hence would not be an attachment of a commercial assets but an order of payment concerning non-commercial assets.

 

These funds are categorically protected from attachment according to the Law of Federal Sovereign Immunity of the US, says the Government in one of the briefs presented previously. And it adds: The Appellate Court’s decision is the first time that a US Court forbids a foreign sovereign to make use of its property outside of the US. The main objective of the Government in using both defense strategies is to achieve what I call an abstract ruling which means that if it gets swallowed up by the underlying issue (pari passu and the payment formula), that the ruling may not be applicable against the payments made in favor of the holders of the swapped bonds because of the protection provided by the trust fund and the law of sovereign immunity.

 

• Inclusion of payment agencies

 

In addition, they will insist on the technical argument that Griesa’s injunction violates the New York financial system as it covers intermediary agents which cannot be attached according to the Uniform Commercial Code of the US. This may not be a particularly strong argument, as the cautionary measure which the plaintiffs have requested is mainly at the level of the Bank of New York, Depositary Trust Company (DTC) and the so called DTC participants, which means the front-line custody in the payment chain.

 

• Non-attachment of Euro bonds

 

This should be a new argument to be used: this means that the eventual sentence cannot affect the payment of bonds whose fund flow does not pass through New York but Europe, as is the case with Euro-denominated bonds paid in Euroclear and Clearstream, the two depositary agencies for principal titles on this continent. Approximately half the performing debt is in these bonds, which means that the injunctions should be halved accordingly, the Government will say.

 

• Equality

 

As has already been said, the government is also using arguments based on the principle of equality in the treatment of the holdouts and holders of swapped bonds as an additional argument to avoid recognizing Griesa’s and the Appellate Court’s payment formulas (Griesa: payment of 100%, and the Appellate Court: scaled payments). Basically, it is arguing that certain creditors cannot collect according to the original terms with more interest accrued at original rates (for instance, the ruling of US$ 1.4 billion implied an investment of some US$ 50 million, as the titles were negotiated at 12% of their value, while the capital in Griesa’s ruling is some US$ 450 million) and other investors  collect according to the haircuts applied in the 2005 and 2010 swaps (even when the payment of the GDP-tied coupons reduced these haircuts and will eventually completely remove them, as Alfonso Prat Gay never fails to point out): Argentina alleges that although the holders of swapped bonds knew about these lawsuits, they never imagined that the New York justice system would rule like this. If they had known, they would never have entered the swaps, say the briefs. But the equality argument concerning whether to apply compulsory haircuts is unacceptable and may even be rejected in this instance where only the payment formula and the extension of the injunctions are up for discussion.

 

• Future restructuring

 

There is a question mark over whether they will insist on using this argument, meaning, that they will allege that the wide scope of the application of the pari passu clause threatens future restructuring. It will probably be used to ensure consistency, but this point has already been dealt with in solidly-based plaintiff amicus briefs and even from the plaintiffs themselves, alleging that 99% of the sovereign bonds issued under New York laws contain collective action clauses, which means that with a majority of between 75 and 85% in the swaps, there would be no holdouts, and hence no litigation on their part. But I cannot dismiss the possibility that renewed arguments and research be used to support this point.

 

• A third swap?

 

The big question is whether there will be a third swap. Obviously, the more aggressive of the funds have already said that they will not accept a swap under the terms used in 2010. And the government cannot offer anything better until December 31, 2014, even if it wanted to (which is highly unlikely in the light of several different statements made). The mention of a new swap would show a willingness to pay, although, as the plaintiffs have said, the swap could not be imposed compulsorily. This would mean that the swap terms would not be acceptable to the Court as a payment formula. It would help the Argentine position, although it might not be enough.

 

The results are many and varied. The questions being asked by the market are: what will happen in the February 27 hearing? When will the Court issue its ruling? What will be the result? Will there be an appeal? What will the Government do if it does not receive a favorable ruling? Will it comply (this looks unlikely)? Will it default (I understand that it wants to avoid this)? Will it use payment mechanisms in Argentina or Europe (this could be possible)? If this is the case, will it be with or without the consent of the bondholders (this must be with their consent)? In this last case, what will American courts say? Furthermore, what will happen if there are any attempts to attach the payments in Europe using the rulings issued by Griesa and the court. There are lots of open-ended scenarios.