Reopening of Sovereign Debt Exchange

1. Background and Precedents

On August 27, 2013, the Argentine Executive Branch filed a bill with Congress that will be considered by the Senate (1) over the next few days (the “Bill”). The Bill provides for a new exchange offer of the defaulted sovereign bonds that were not tendered in the exchange offers launched in 2005 and 2010 (holdouts).

The Bill was filed five days after the Court of Appeals for the Second Circuit of New York affirmed Judge Thomas Griesa’s decision in favor of NML and the plaintiffs in re: “NML Capital, Ltd. vs. Republic of Argentina”.

As a result of the 2005 and 2010 debt exchanges, the Republic of Argentina restructured 93% of its defaulted sovereign debt. By means of this third exchange, Argentina aims to restructure the remaining 7% of defaulted bonds, or at least to reduce the number of holdouts by giving them the opportunity to accept the same terms that were offered to the bondholders that accepted the prior exchanges.

The law proposed by the Bill is required to suspend the effect of some sections of Law N° 26,017 (called “Lock Law”) that restrict the reopening of any voluntary sovereign debt exchange. The “Lock Law” was enacted as an incentive for holders to accept the 2005 exchange. It restricts the Executive Branch from reopening the exchange process and from entering into any settlement with respect to the defaulted bonds after the 2005 exchange was completed. As a result, in the 2010 exchange (by means of Law N° 26,547) as well as in this new exchange (by means of the Bill), the effects of the “Lock Law” are suspended to allow theses debt exchanges to be implemented.

The Bill provides substantially the same terms as those of Law N° 26,547, which was enacted at the end of 2009 to launch the exchange carried out in 2010, with the following differences: (i) the Bill adds a new section which provides the replacement “ipso iure” of the defaulted bonds deposited with any court of any jurisdiction whose holders did not enter in the 2005 and 2010 exchanges by new bonds par value in Pesos (Argentine local currency) for 2038 (we understand that it would be a sort of “cramdown exchange” against those holdouts that litigated and did not accept the previous exchanges) ; and (ii) the Bill does not provide a specific term by which the exchange must be completed, but instead leaves the exchange term open until the Executive Branch declares that it is closed.

2. The Bill

The Bill:

1. authorizes the Executive Branch, by means of the Ministry of Economy and Public Finance, to carry out all the necessary acts to conclude the restructuring procedure of the defaulted bonds;
2. provides that the financial terms and conditions to be offered cannot be better than those offered to creditors in the 2010 debt restructuring;
3. provides that the bondholders interested in participating in this new exchange must (i) resign from all of their rights under their defaulted bonds, including those rights which had been recognized by any judicial or administrative resolution or arbitration award; and (ii) release the Republic of Argentina from any judicial, administrative, arbitral claim or any other claim already filed or which might be filed in the future aimed at collecting principal or interests under such bonds;
4. prohibits from offering more favorable treatment to those bondholders that initiated judicial, administrative or arbitral claims than to those bondholders who did not;
5. provides that the bonds in default deposited for any cause or title with any court of any jurisdiction whose holders did not accept the previous exchanges (2005 or 2010), or have not expressly stated in the relevant judicial claims their aim to not accepting them, are automatically replaced by the “Argentine Par Value Bonds Step Up 2038”, and
6. suspends the effects of the provisions of the Lock Law until the Executive Branch states that the restructuring procedure of the defaulted bonds has been completed.

3. US Court of Appeals’ ruling in re: “NML Capital, Ltd. v. Republic of Argentina”

In re: “NML Capital, Ltd. v. Republic of Argentina” the United States Court of Appeals for the Second Circuit (New York) (2) affirmed Judge Griesa’s ruling and stayed enforcement of the injunctions pending resolution of a petition to the Supreme Court for a writ of certiorari.

The plaintiffs in this case (NML Capital, together with other funds and individuals) hold bonds issued under a Fiscal Agency Agreement prior to Argentina’s 2001 default (the “FAA Bonds”). These FAA Bonds held by the plaintiffs represent an aggregate principal and interest amount outstanding of approximately USD1.33 billion. The plaintiffs did not accept to enter the exchange offers carried out by Argentina in 2005 and 2010 which implied a haircut and/or deferral of payment, and preferred to litigate instead. They claim payment of 100% of the amount due and outstanding under the defaulted bonds they hold.

The main argument of the plaintiffs in the NML case is that the pari passu clause provided under the FAA Bonds requires Argentina to make payments to the plaintiffs if a payment will be made under the exchange bonds.

Judge Griesa (3) (United States District Court for the Southern District of New York) agreed with the plaintiff’s claim, ruling that making payments under the exchange bonds while refusing to pay the amounts that continue to be outstanding under the FAA Bonds constitutes a breach of the pari passu clause. Judge Griesa ordered that whenever Argentina pays any amount due under the bonds issued under the 2005 and 2010 exchanges (the “Exchange Bonds”), Argentina should make a “ratable payment” to plaintiffs.

The Court of Appeals (4) had affirmed Judge Griesa’s ruling and ordered Argentina to make ratable payments to plaintiffs concurrent with or in advance of the payments made to the Exchange Bonds in the terms provided in Judge Griesa’s judgment, but remanded the case to Judge Griesa for clarification of how the ratable payment formula is intended to operate.

As provided by Judge Griesa’s formula, if Argentina pays 100% of amounts due under the Exchange Bonds at a given time, it must also pay plaintiffs 100% of the amount due under the FAA Bonds. This implies that to pay 100% of an installment of interest due under the Exchange Bonds, the Republic of Argentina would be required to simultaneously pay the full US$1.3 billion of principal and interests due under the FAA Bonds held by the plaintiffs.

In the decision of August 23, 2013 the Court of Appeals affirmed Judge Griesa’s “ratable payment” calculation formula. The Court of Appeals also resolved to stay its enforcement pending a resolution of an appeal filed before the US Supreme Court.

The second aspect which was pending of resolution by the Court of Appeals was the effects of the injunctions ordered by Judge Griesa with respect to third parties (in particular, the Bank of New York, as a participant in the payment process of the Exchange Bonds since it is the indenture trustee that receives the funds from the Republic of Argentina in order to forward the payments to the bondholders). The Court of Appeals also affirmed Judge Griesa’s ruling in this aspect, binding the Bank of New York to the terms of such orders.

One of the cornerstone defenses of Argentina in this case is that Judge Griesa’s orders violate the Foreign Sovereign Immunities Act by forcing it to use resources that the statute protects. The Court of Appeals resolved that Judge Griesa’s decisions do not violate such statute because “[t]hey do not attach, arrest, or execute upon any property” as provided by the statute. Instead it orders Argentina to make payments to plaintiffs under the FAA Bonds in compliance with the pro- rata clause without specifying which assets or resources should be used to such effect.

In addition to affirming the District Court’s decision, the Court of Appeals referred to the main defenses invoked by Argentina when alleging injuries to itself, to the Exchange Bonds holders, to the participants of the payment system for the Exchange Bonds, and to the public interest. All defenses were dismissed by the Court of Appeals.

4. Closing Remarks

The Bill will be discussed and considered in the Argentine Congress in the next days. Should the Bill be enacted into law, the Ministry of Economy and Public Finance should provide the details of the offer and carry out the necessary acts to implement this new exchange.

In the meantime, New York litigation between the holdouts and the Republic of Argentina continues. The United States Supreme Court needs to resolve if it takes the case, and if so, issue a judgment on the matters subject to appeal. The Court of Appeals decision of August 23, 2013 ordered that the judgments of the New York courts ordering enforcement of the pari passu clause will be stayed until then.