September 30, 2023

Cayman hedge fund puts Argentina under the hammer

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argentina-vulture-protest-large“Led by NML Capital Ltd., a Cayman Islands hedge fund”, has put Argentina under its hammer to pay its debt that was due on Monday 30th June 2014. Argentina hasn’t.

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NML Capital: ‘Argentina has refused to negotiate’

From Buenos Aires Herald

NML Capital holdout investors in Argentine sovereign debt said today they have not met with the government to negotiate a settlement on defaulted debt, and accused the government of refusing to enter talks.

“Argentina’s professed willingness to negotiate with its creditors has proven to be just another broken promise. NML is at the table, ready to talk, but Argentina has refused to negotiate any aspect of this dispute,” said Jay Newman, senior portfolio manager at Elliott Management, which runs NML Capital Ltd, one of the lead holdouts in the case.

Argentina last Thursday deposited a regularly scheduled coupon payment due June 30 for restructured bonds without also making a court ordered payment to holdout investors at the same time.

The government has until July 30, the end of a 30-day grace period, in which to come to an agreement and settle the long-standing legal dispute or fall into default for the second time in 12 years.

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Even Lionel Messi can’t solve Argentina’s debt crisis

By Jim Armitage From The Independent UK

Global Outlook Monday (30) marks a grim day for Argentina, at a time of many grim days. For it is on Monday that the economically troubled country is due to make its next interest repayment on bonds to lenders that agreed to reduce the amount they are owed.

ArgentinaIt’s no small cheque either – $832m (£490m).

Buenos Aires wants to pay. It has deposited $539m in the Bank of New York Mellon’s accounts at the Argentinian central bank, says the country’s finance minister, while the remainder is in other deposit accounts waiting to be handed over.

The trouble is, it can’t pay.

Because under the controversial ruling by the US Supreme Court last week, Argentina must also stump up 100 cents in the dollar to vulture funds for the debt that they bought – at a large discount – after the country’s 2001 default.

On Thursday, Argentina asked the US District Judge Thomas Griesa if it could pay only the creditors that accepted a haircut. It asked him to put a stay on his earlier order that the country could make no payments without paying the vultures their dues at the same time. But he refused.

Meanwhile, the vultures yesterday lodged another court order in protest at Argentina depositing the funds to make the repayment to the lenders that have accepted haircuts. They are tightening their legal headlock every time Argentina wriggles.

All this means that another Argentinian debt default looms large

In reality, Monday’s deadline will probably come and go with no payment and no default because the country has a 30-day grace period.

It seems likely that Argentina will come to some sort of deal with the funds over that period, agreeing to pay them less than the 100 cents they are demanding, but more than the haircut lenders accepted. Doubtless, that would lead those with the short hair to demand the same amount.

This settlement would take a huge chunk out of Argentina’s wallet. A repayment in full for all lenders would cost it $15bn – half the country’s entire reserves. So even if the vultures accepted a steep discount (highly unlikely), the country would still be hurting badly. However, at least it would avoid the default that would see it financially isolated for many years to come.

A miserable time, then, for a battle-weary nation. Even Messi could struggle to lighten the mood.

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Argentina learns the downside of global finance as judge blocks payments

By Daniel FisherFrom Forbes

Argentina is a victim of the very global financial system that it relies upon to fund its chronic deficits. A federal judge in New York yesterday refused to allow Argentina to pay interest to bondholders who agreed to a debt restructuring without also paying holdout hedge funds led by billionaire Paul Singer. Today he told both sides to negotiate a way out of the problem.

“Get the republic to the table,” U.S. District Judge Thomas P. Griesa told lawyers at the conclusion of a hearing today, according to Newsday.

Argentina is crying foul, saying Griesa’s ruling will force it either to default on its sovereign debt or exhaust its foreign currency reserves to pay off a bunch of holdout, vulture investors. But the problem is of Argentina’s own making.

When Argentina sold the bonds in the 1990s it chose to issue them under New York law, providing investors a measure of certainty should the country live up to its reputation for defaulting on its debt (seven times since it gained independence from Spain in 1816, most recently in 2001.) Now a New York judge is merely holding Argentina to the bargain – a decision upheld by the Second Circuit Court of Appeals and, in a decision last week, the U.S. Supreme Court.

“What the court of appeals said is a market is buyers and sellers, and New York has always vindicated the right of contracts,” said Antonia Stolper, a partner with Shearman & Sterling in New York who frequently deals with sovereign debt issuers. New York judges tend to say “we interpret the contract as written, so buyers and therefore creditors feel more protected.”

The problem, from Argentina’s standpoint, is there are two contracts in play here. One is the 1990s-era contract covering some $1.5 billion in debt that Singer’s NML Capital and a handful of other hedge funds scooped up at a discount, which says they must be paid in full if Argentina pays anybody else. Then there’s the contract covering the bonds Argentina gave holders of 92% of its $81 billion in defaulted debt in the restructurings it negotiated in 2005 and 2010.

Those investors took a haircut on their bonds but a Rights Upon Future Offerings (RUFO) clause requires Argentina to pay them the same terms if it “voluntarily” agrees to pay the holdouts. The country says that would require it to disburse $15 billion in interest immediately – half its foreign-currency reserves – and $120 billion over time.

Argentina and its sympathizers like Jubilee USA say the country’s economy is being held hostage by “vulture funds” that seek “windfall profits” by enforcing onerous legal terms on a country that can’t afford to repay them. The real problem, however, is there is no way for a country to go bankrupt like a private company, allowing a judge to forcibly sort out who’s owed what and how much they’ll get paid.

Unlike with a company in bankruptcy, “you don’t have access to the assets,” Stolper told me, so the only way to restructure debt is through negotiations. “What this does is in the restructuring context, it gives the holdouts a certain amount of power,” because they can demand to be repaid or they will interfere with the process as Singer and Elliott Associates have done here.

One solution is so-called Collective Action Clauses, which make life more expensive for holdouts by requiring them to buy up a third or more of the bonds in any issue before they can block a restructuring negotiated by the majority. European issuers now must include CACs in their sovereign debt, but as critics such as Pimco and the Republic of Argentina itself maintain, they aren’t a panacea. The experience with emerging-market debt, where CACs have long been prevalent, is that dispersed small holders can still prevent a supermajority from negotiating a restructuring, Pimco says.

So Argentina’s crisis likely will conclude where it began, in New York. The country can’t realistically fund its operations by issuing bonds in its own currency, in Argentina, because sovereign debt is a global market, Stolper said.

“People don’t have pieces of paper with little coupons they can go to Argentina and cash,” she said. And creditors can’t resort to the 19th-century tactic of dispatching gunboats to seize the country’s assets, although Elliott Associates has attempted to seize a naval training ship and official government aircraft from Argentina.

Instead the parties will continue to litigate. One question is whether Argentina needs to live up to the RUFO clause if a judge “orders” – Argentina’s words, in this full-page ad it ran earlier this week in U.S. newspapers – it to pay the holdouts. There’s room for a lawyer to negotiate here, Stolper said, since the RUFO clause only applies if Argentina “voluntarily” pays the holdouts.

“What does the Republic making a voluntary offer mean in this case?” she asked. “That’s called interpreting a contract.”

The RUFO clause is in effect until Dec. 31, creating interesting opportunities for Argentina to work out a deal with the holdouts and avoid honoring the terms it struck with the bondholders who took the restructuring. Even if it obeys the judge and pays Singer, it has until the end of July before it officially defaults — perhaps time to work something out with them.

Some critics have suggested Argentina’s struggles are making New York less desirable as a global financial center. It’s only because Argentina’s financial intermediaries, including Bank of New York, are subject to U.S. judges that the country faces any pressure to honor its contracts and pay the holdouts.

Stolper said emerging-market countries will keep coming back to New York precisely because it offers investors certainty. Judge Griesa broke new ground by rejecting Argentina’s argument that it was protected by sovereign immunity from having a U.S. court order discovery from the banks that handle its finances.

“That was an innovation,” Stolper said. But it’s had little effect on foreign borrowers, she said. “We’ve seen a number of deals go out,” she said, “even after the decision.”

IMAGE: Coat of arms of Argentina Can we shake on it? (Photo credit: Wikipedia)

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695 F. 3d 201, affirmed.

Syllabus [HTML] [PDF]

Opinion, Scalia [HTML] [PDF]

Dissent, Ginsburg [HTML] [PDF]

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued.The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader.See United States v. Detroit Timber & Lumber Co., 200 U. S. 321.




certiorari to the united states court of appeals for the second circuit

No. 12–842. Argued April 21, 2014—Decided June 16, 2014

After petitioner, Republic of Argentina, defaulted on its external debt, respondent, NML Capital, Ltd. (NML), one of Argentina’s bondholders, prevailed in 11 debt-collection actions that it brought against Argentina in the Southern District of New York. In aid of executing the judgments, NML sought discovery of Argentina’s property, serving subpoenas on two nonparty banks for records relating to Argentina’s global financial transactions. The District Court granted NML’s motions to compel compliance. The Second Circuit affirmed, rejecting Argentina’s argument that the District Court’s order transgressed the Foreign Sovereign Immunities Act of 1976 (FSIA or Act).

Held: No provision in the FSIA immunizes a foreign-sovereign judgment debtor from postjudgment discovery of information concerning its extraterritorial assets. Pp. 4–12.

(a) This Court assumes without deciding that, in the ordinary case, a district court would have the discretion under Federal Rule of Civil Procedure 69(a)(2) to permit discovery of third-party information bearing on a judgment debtor’s extraterritorial assets. Pp. 4–5.

(b) The FSIA replaced an executive-driven, factor-intensive, loosely common-law-based immunity regime with “a comprehensive framework for resolving any claim of sovereign immunity.” Republic of Austria v. Altmann, 541 U. S. 677. Henceforth, any sort of immunity defense made by a foreign sovereign in an American court must stand or fall on the Act’s text. The Act confers on foreign states two kinds of immunity. The first, jurisdictional immunity ( 28 U. S. C. §1604), was waived here. The second, execution immunity, generally shields “property in the United States of a foreign state” from attachment, arrest, and execution. §§1609, 1610. See also §1611(a), (b)(1), (b)(2). The Act has no third provision forbidding or limiting discovery in aid of execution of a foreign-sovereign judgment debtor’s assets. Far from containing the “plain statement” necessary to preclude application of federal discovery rules, Société Nationale Industrielle Aérospatiale v. United States Dist. Court for Southern Dist. of Iowa, 482 U. S. 522, the Act says not a word about post judgment discovery in aid of execution.

Argentina’s arguments are unavailing. Even if Argentina were correct that §1609 execution immunity implies coextensive discovery-in-aid-of-execution immunity, the latter would not shield from discovery a foreign sovereign’s extraterritorial assets, since the text of §1609 immunizes only foreign-state property “in the United States.” The prospect that NML’s general request for information about Argentina’s worldwide assets may turn up information about property that Argentina regards as immune does not mean that NML cannot pursue discovery of it. Pp. 5–10.

695 F. 3d 201, affirmed.

Scalia, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Thomas, Breyer, Alito, and Kagan, JJ., joined. Ginsburg, J., filed a dissenting opinion. Sotomayor, J., took no part in the decision of the case.

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After a severe economic, political and social crisis, Argentina was forced to default on its debt in 2001.Under a new government, Argentina successfully restructured almost 93% of its debt and has serviced that restructured debt ever since. However, a small minority of bondholders have not yet agreed to the terms accepted by the overwhelming majority of creditors who participated in Argentina’s exchange offers because they seek privileged and unwarranted conditions. Some of these holdouts are suing Argentina before U.S. courts and are determined to disrupt the flow of

payments to the creditors who participated in Argentina’s exchange offers.

Sovereigns, multilateral institutions like the IMF, and experts have all stated that the consequences of this case go well beyond Argentina and the plaintiffs. The future of all sovereign debt restructurings is at stake.

What is the case NML v Argentina about?

•   There is no sovereign bankruptcy regime. Unlike private companies, sovereigns cannot declare bankruptcy

when their debts become unsustainable. When a company files for bankruptcy and reaches an agreement with a certain threshold of its creditors, no minority creditor can block the debt restructuring process, much less threaten to deprive those creditors who negotiated in good faith of property that belongs to them.

•   Sovereign financial crises have been a regular feature of modern international finance. In the last fifteen years alone, significant financial crises have been experienced by a long list of widely varied countries, both developing and developed economies.

•   Argentina followed established international practice by voluntarily restructuring its debt under the principle of inter-creditor equity, which requires that all similarly-situated holders of defaulted debt be treated equally. However, current court rulings are threatening to turn both inter-creditor equity and established principles of sovereignty on their head.

•   A minority of professional litigants is attempting to obtain privileged conditions, consecrating inequality amongst bondholders. The case will determine whether a minority of debt profiteers will be able to secure a new weapon that would empower hold-out creditors around the world to threaten the flow of payments to bondholders who accept debt restructurings, which in turn would render such restructurings virtually impossible in the future. What bondholder would participate in a debt restructuring if they knew that the flow of payments to them could be disrupted by a minority of holdouts through litigation?

2 Why are these plaintiffs known as “vulture funds” and what is their claim?

•   Led by NML Capital Ltd., a Cayman Islands hedge fund, plaintiffs in this case are primarily “vulture funds” that represent a small proportion of the 7% of holdouts. “Vulture funds” exploit the absence of a sovereign bankruptcy regime and seek windfall profits by buying distressed debt at steep discounts, then suing to enforce its original terms while ignoring any restructuring efforts and harassing good-faith creditors in the process. In fact, in the Argentine case, a significant part of the plaintiffs’ holdings was purchased many years after the default occurred at pennies on the dollar.

• Plaintiffs have continuously rejected the restructuring terms accepted by the overwhelming majority of Argentina’s creditors because they seek privileged conditions (payment in full of original nominal amounts plus interests). These litigants not only sued Argentina before U.S. courts, but are insisting that Argentina be forced not to pay the other 93% of creditors holding restructured debt unless they are paid in full based on a novel and counterintuitive reading of a boilerplate provision, the pari passu clause.

•   As shown by public registries, the litigants have spent millions of dollars in lobbying and PR campaigns against

Argentina. These campaigns utilize false and outright misleading information.

•   “Vulture funds” often use aggressive and bad faith tactics to reach their goals. They follow a strategy of legal harassment, abusing the legal systems around the world. Argentina was forced to litigate in the courts of France, the United States, Belgium and Switzerland in order to stop “vulture funds” from seizing diplomatic and military bank accounts and other property protected by international law such as the reserves from Argentina’s Central Bank held at the Federal Reserve Bank of New York (FRBNY ) and the Acquarius SAC.D Satellite in California (part of an Argentine-US project with NASA), among many others.

•   The most recent and notorious example was the seizure of the Argentine naval vessel “ARA Libertad” in the Port of Tema, Ghana, by NML, which was released by a unanimous ruling of the United Nations International Tribunal of the Law of the Sea.

3 What is Argentina’s position?

•   Argentina has never repudiated its debt and is committed to treating all bondholders equally, including these litigants.

•   In 2001, Argentina’s indisputable inability to pay its sovereign debt forced it to defer payments on approximately US$80 billion in bonds. Since 2003 a new government has implemented a successful debt management strategy under the premise that it was necessary to resume economic growth in order to be able to service debt. After two highly successful restructuring processes in 2005 and 2010, Argentina restructured its debt with almost 93% of its creditors. The debt swap was based on the country’s effective payment capacity. The participants received new, performing debt instruments that Argentina has consistently and timely serviced ever since.

•   In September 2013, Argentina suspended indefinitely its Lock Law (which was designed to ensure that holdouts would not be treated better than exchange bondholders), once again allowing holdouts to accept an exchange offer under the same terms accepted by approximately 93% of defaulted debt holders.

•   Argentina remains committed to finding a solution for all bondholders following the principle of inter-creditor equity.

4 What has the U.S. stated about this case in its amicus briefs before New York courts?

•   The U.S. has submitted two amicus briefs in support of Argentina’s position.

•   In its briefs the U.S. has warned about the systemic consequences of this case and its impact on U.S. interests in the following terms:

°          “Voluntary sovereign debt restructuring will become substantially more difficult, if not impossible, if holdout creditors are allowed to use novel interpretations of boilerplate bond provisions to interfere with the performance of a restructuring plan accepted by most creditors and to dramatically tilt the incentives away from consensual, negotiated restructuring in the first place.”

°          “Notwithstanding recent developments in sovereign debt contracts that promote collective action by creditors, the district court’s interpretation of the pari passu provision could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises. Allowing creditors recourse to such an enforcement mechanism would have adverse consequences on the prospects for voluntary sovereign debt restructuring, on the stability of international financial markets, and on the repayment of loans extended by international financial institutions (“IFIs”).”

°          “Because the district court’s interpretation of the pari passu clause disrupts settled expectations concerning the scope and effect of boilerplate language contained in many sovereign debt instruments, it is contrary to U.S. policy interests.”

°          “In addition, the decision could harm U.S. interests in promoting issuers’use of New York law and preserving

New York as a global financial jurisdiction.”

°          “The decision could encourage issuers to issue debt in non-U.S. currencies in order to avoid the U.S. payments system, causing a detrimental effect on the systemic role of the U.S. dollar.”

5 What did the New York courts rule?

•   Based on an outlier and deeply flawed interpretation, U.S. courts have concluded so far that Argentina breached

the pari passu clause. This radically new judicial interpretation implies that a sovereign cannot pay creditors who have accepted an exchange offer unless holdouts from the exchange offer are paid in full, effectively granting privileged conditions to holdout creditors. This counterintuitive interpretation of a boilerplate provision upsets settled financial market expectations and threatens all future sovereign debt restructurings.

•   The courts have also ruled that Argentina must pay the full amount of the judgment (US$1.33 billion corresponding to principal plus interest) to the plaintiffs whenever it services the restructured debt. Thus, the plaintiffs were granted a remedy that would allow them to disrupt the flow of payments to the 93% of bondholders who participated in the restructurings.

•   The court stayed (suspended) the enforcement of its decision pending a petition for a writ of certiorari before the U.S. Supreme Court. On February 18th, 2014, Argentina asked the U.S. Supreme Court to review these rulings (case “Republic of Argentina vs. NML Capital LTD” Docket Nº 13-990).

6 Why is Argentina’s case not unique?

•   The pari passu clause in Argentina’s bonds is a standard clause that appears in virtually all modern sovereign

bonds often with materially identical

• The courts’ rulings in the case will therefore have consequences for almost every sovereign that issued international debt over the past 30 years. As eloquently stated by a panel of economic experts, “[…] recent rulings in New York may give creditors the first broadly replicable remedy against sovereign debtors since the days of gunboat diplomacy a century ago.” vii

7 What are the IMF’s and the international community’s views on this case?

•   The International Monetary Fund (IMF) has warned about the rulings’ consequences for the international financial system. In a document approved by its Board of Directors, the IMF stated that:

°          “[…] ongoing litigation against Argentina could have pervasive implications for future sovereign debt restructurings by increasing leverage of holdout creditors.”

°          “[…] the Argentine decisions, if upheld, would likely give holdout creditors greater leverage and make the debt restructuring process more complicated for two reasons. First, by allowing holdouts to interrupt the flow of payments to creditors who have participated in the restructuring, the decisions would likely discourage creditors from participating in a voluntary restructuring. Second, by offering holdouts a mechanism to extract recovery outside a voluntary debt exchange, the decisions would increase the risk that holdouts will multiply and creditors who are otherwise inclined to agree to a restructuring may be less likely to do so due to inter-creditor equity concerns.” viii

•   In addition to the opinion of the IMF and to the amicus briefs presented by the U.S. Government, the Republic of France has also submitted an amicus brief before U.S. courts. International experts and organizations including the G77 plus China, Nobel Laureate Joseph Stiglitz, Professor Nouriel Roubini, former Finance Minister of Colombia, José Antonio Ocampo and Jubilee USA Network, among many others, have also supported Argentina’s position underscoring the potential negative implications of this case for the global financial system.ix In addition, the Community of Latin American and Caribbean States (CELAC; comprised of the 33 countries in the region), recently highlighted the importance of guarantying orderly debt restructuring processes.

8 Why are the court’s decisions at odds with the U.S. Foreign Sovereign Immunities Act (FSIA)?

• The plaintiffs are not only threatening to disrupt inter-creditor equity but are also meddling with sovereign assets that are specifically protected under U.S. law. According to the U.S. Foreign Sovereign Immunities Act (FSIA), foreign State property is immune from attachment, arrest and execution except if it is located in the United States and being used for commercial activity in the United States. State property located outside the United States lies beyond the reach of a U.S. court’s enforcement authority.

•   These court’s decisions run contrary to the text, structure, history and purpose of the FSIA: they coerce a foreign

State into paying money damages with immune assets located outside the United States.

•   The court rulings not only purport to exercise jurisdiction over foreign State property, but also have the effect of dictating to a sovereign State its sovereign debt policy within its own territory, with obvious potential for creating tensions in foreign relations.

9 Why can’t Collective Action Clauses (CACs)

solve the problem?

• While the plaintiffs have insisted that Collective Action Clauses (CACs) would solve any holdout problems, experts have clearly stated that this is false. Even when bonds contain CACs, a small minority of holdouts can still block an entire debt restructuring process.

•   First, many sovereign bonds around the world do not have CACs. The most conservative estimates show that the outstanding stock of bonds without CACs amount to between US$329 billion and US$593 billion.

•   Second, CACs in most international bonds do not prevent hold-out creditors from buying up blocking positions in single series of bonds, effectively preventing any debt restructuring of that series. Indeed, recent evidence from Greece’s debt restructuring shows that “[…] of thirty-six bonds governed by foreign (English) law containing collective action clauses that were eligible to participate in the debt exchange, only seventeen bonds were able to be successfully restructured using collective action clauses. […] Hold-out creditors prevented the operation of the collective action clauses in the remaining bonds, amounting to approximately EUR 6.5 billion in un- restructured claims, or thirty percent of the total value of bonds governed by foreign law.” x

10 How are the rights of bondholders affected?

•   These court rulings threaten to disrupt the flow of payments to the close to 93% of bondholders who accepted Argentina´s debt restructuring offer and have been collecting payments ever since. Holders of this debt include many U.S. taxpayers such as institutional investors, teachers associations, pension funds and universities. Therefore, the rulings inequitably prioritize the interests of a group of private litigants holding a small fraction of the Argentina’s total debt over those of the overwhelming majority of Argentina’s bondholders.

•   The current rulings also negatively affect other third parties such as transfer or paying agents, including those located outside the United States.


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