Sovereign Debt: Litigation and Negotiations Continue

1. Background
 
Please see our articles published in Marval News # 131, 132, 133 and 140 which describe the background, precedents and rulings of the United States courts in re: “NML Capital, Ltd. v. Republic of Argentina”, and contain information regarding the law for the reopening of the argentine sovereign debt exchange.
 
We do not intend in this article to make an exhaustive analysis of this matter, or issue an opinion on the facts or potential future scenarios. We only describe the main facts occurred during the last month and until the closing of this Marval News edition.
 
2. The current situation of the bonds issued in 2005 and 2010 exchanges
 
After the Supreme Court of the United States denied the petition for certiorari filed by the Republic of Argentina to review the second ruling of the Court of Appeals, Argentina transferred funds to the relevant intermediary financial institutions to make payments of interests due under the Discount Bonds on June 30. Those payments corresponding to Discount Bonds issued under New York and English Law amounting to USD 539 million were credited in The Bank of New York Mellon’s account (as trustee and common depositary) at the Central Bank of Argentina.  Those funds remain frozen.
 
The day after such transfer, Judge Griesa called for a hearing as requested by the plaintiffs, who considered that such transfer had been made in violation of the judge’s order who obliged the Republic of Argentina to pay them 100% of their credit simultaneously with any payment under the Exchange Bonds, pursuant to the interpretation of the pari passu clause included in the bonds in litigation.
 
The Bank of New York Mellon and the rest of the intermediary banks and clearinghouses which participate in the payment mechanism of all the exchange bonds filed motions for clarifications regarding what they should do with the funds that had been transferred to their accounts by the Republic of Argentina to make payments under the Discount Bonds. The motions for clarifications were filed pursuant to Judge Griesa’s order that The Bank of New York Mellon and the rest of the entities involved in the payment circuit were obliged to comply with his order.
 
The only decision issued by Judge Griesa was in response to Citibank N.A., Argentine Branch’s petition: in his resolution dated June 27 he clarified that his decisions did not prohibit payments by such institution on Peso and U.S. Dollar denominated bonds, governed by Argentine law and payable in Argentina. Consequently, payments of interests owed under the Discount Bonds issued under Argentine law were made to holders of such bonds.
 
3. The universe of bonds reached by Judge Griesa’s decisions
 
Judge Griesa called for a hearing on July 22 to hear arguments regarding the universe of bonds that would be subject to his decisions related to the pari passu clause.  In the 2005 and 2010 debt restructurings, the Republic of Argentina issued Discount Bonds, Par Bonds, Quasi-Par Bonds and GDP linked securities defined in this litigation as “Exchange Bonds”.  These Exchange Bonds were issued in U.S. dollars, Euros, Yens and Pesos.  Bonds governed by Argentine law are denominated in Pesos and U.S. Dollars; bonds governed by New York law are denominated in U.S. Dollars; bonds issued under English law are denominated in Euros; and bonds issued under Japanese law are denominated in Yens.
 
The plaintiffs consider that all the Exchange Bonds (regardless if they are or not the bonds payable through The Bank of New York Mellon, or bonds subject to other legislations other than New York law) should be subject to the judge’s decision that orders Argentina to pay them simultaneously with payments made to the Exchange Bond holders, since all had to be considered as “external indebtedness” for the purposes of the pari passu clause included in the bonds in litigation.
 
As of July 31, 2014, the motions for clarification filed by the banks and clearinghouses regarding this point have not been resolved formally by Judge Griesa. Consequently, with the exception of the bonds governed by Argentine law as mentioned above, the funds transferred by the Republic of Argentina to make payments on June 30 are retained on the accounts of the relevant banks. These entities would be expecting the judge’s orders to determine what to do with those funds.  
 
4. Negotiations before Daniel A. Pollack
 
Judge Griesa requested that the parties negotiate before the special master to reach an agreement which contemplates the rights of all the parties involved, including those of the holders of Exchange Bonds.
 
As of July 31, 2014, after five weeks of negotiations before Daniel A. Pollack, the plaintiffs and the Republic of Argentina have not reached an agreement. On July 30 the 30 day grace period provided under the Discount Bonds lapsed.  Argentina claims that it complied with its payment obligation by means of transferring the funds prior to June 30 and, therefore, an event of default has not occurred. However, the funds were retained by the Bank of New York Mellon and were not transferred to the Discount Bond holders.  This may be interpreted as an event of default that may allow bondholders of at least 25% of the Discount Bonds to request the acceleration of such bonds.
 
We expect the negotiations will continue during the next days, and that there will be volatility in the prices of the sovereign bonds and in general of Argentine assets until this matter is resolved.