Saturday, August 24, 2013
Argentina loses appeal in bondholder fight
People walk in front of the Central Bank yesterday.
New York judges delay implementing the decision pending a ruling by the US Supreme Court
Argentina lost its appeal of a US court order requiring it to pay US$1.33 billion tohedge funds that refused to accept steep discounts when the nation restructured its debt.
The decision by the Second US CircuitCourt of Appeals in New York is the latest in a standoff between US courts and the Argentine government that some investors fear could result in a new default by Argentina.
While Argentina and its supporters contended a ruling against it could threaten future sovereign debt restructurings, the court called the case an “exceptional one” with little apparent relation to future transactions.
The court also had harsh words for the government of Argentine President Cristina Fernández de Kirchner, which has called the hedge funds “vultures” and vowed not to pay them.
“Argentina’s officials have publicly and repeatedly announced their intention to defy any rulings of this Court and the district court with which they disagree,” Circuit Judge Barrington Parker wrote for a three-judge appeals panel.
The case stems from Argentina’s US$100 billion default on its debt in 2001. In two subsequent restructurings, in 2005 and 2010, creditors holding about 93 percent of the debt received 25 cents to 29 cents on the dollar.
The court stayed the decision pending review by the US Supreme Court, giving Argentina a reprieve and nervous investors some relief. (See story below)
Dissident bondholders led by the hedge funds NML Capital Ltd, which is a unit of Paul Singer’s ElliottManagement Corp, and Aurelius Capital Management refused to go along with the restructurings, arguing in court that they should be paid in full.
The case came to a head in November 2012, when US District Judge Thomas Griesa in New York ordered Argentina to pay US$1.33 billion into a court-controlled escrow account for the dissident bondholders. And he ordered Argentina not to pay its other bondholders without making the payment, raising the prospect that Argentina could go into default.
While Argentina lost the appeal, the Second US Circuit stayed the effects of its ruling, giving Argentina some reprieve. The court starts its new term in October and, if it agrees to take the case, it may not rule until the following June.
“The court’s decision against Argentina is what we have been expecting,” said Stuart Culverhouse, head of research at Exotix in London. “Market disappointment may be tempered though by the continuation of the stay with the Supreme Court appeal.”
In the decision, Parker wrote that the court believed “it is equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing”.
“Because the district court’s decision does no more than hold Argentina to its contractual obligation of equal treatment, we see no abuse of discretion,” Parker added.
‘Not about the law’
The ruling rejected Argentina’s arguments that the order to pay the holdout bondholders would unjustly hurt itself, participants in the bond payment system and the public. It also rejected a claim by bondholders who agreed to the restructuring that Griesa’s ruling would prevent them from getting paid, based on Argentina’s refusal to pay the holdouts.
“This type of harm — harm threatened to third parties by a party subject to an injunction who avows not to obey it — does not make an otherwise lawful injunction inequitable,” Parker wrote.
Sean O’Shea, a lawyer for a group of bondholders including Gramercy Funds Management who participated in the debt restructuring, said in a statement the opinion “unfortunately glosses over” the impact on his clients.
But Theodore Olson, a lawyer for NML, one of the dissident hedge funds, said in a statement the ruling “confirms that Argentina is not above the law.”
Parker said that in light of the “unusual nature of this litigation,” the court had invited Argentina to propose an alternative payment formula that it was willing to commit. Argentina put forward “no productive proposals”, Parker wrote.
The opinion quoted Jonathan Blackman, Argentina’s lawyer, as even telling the court during arguments the country “would not voluntarily obey” Griesa’s injunctions if they were upheld.
Next stop, Supreme Court
Argentina has already sought Supreme Court review of a ruling by the Second Circuit in October last year that Argentina had broken a contractual obligation to treat bondholders equally. A footnote to yesterday’s ruling suggested that the Supreme Court justices may wait instead for an appeal from the more recent decision.
That would delay the high court taking action on the appeal, although it could still potentially decide the case by the end of the court’s next term, which starts in October and runs until June 2014.
Resolution of the case could be delayed further if the justices ask the Obama administration to weigh on whether they should hear the case. Then, the court might not rule on the case, if it decides to hear it, until the term that starts in October 2014.
Reuters
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