There’s been no shortage of voices expressing concern that a New York court’s debt ruling against Argentina would hurt the city’s status as a hub for sovereign bond sales -- from Columbia University Professor Joseph Stiglitz to Obama administration officials.
Ecuador’s $2 billion offering last week suggested those warnings are overstated.
Having halted foreign debt payments twice in the past 15 years, Ecuador is precisely the kind of sovereign borrower that figured to be driven away from the U.S. market by the order forcing Argentina to pay defaulted debtholders in full when making payments on new bonds. Yet after telling investors that its holdout creditors could implement the same tactic that was used against Argentina, Ecuador received $5 billion in purchase bids and locked in yields below 8 percent on 10-year notes, a sign the New York market will keep thriving.
“It’s kind of ironic that the day after the Supreme Court came out with this decision we had not Peru, not Colombia, not even Brazil -- we have freaking Ecuador coming to market,” Javier Kulesz, a Latin America managing director at Nomura Holdings Inc., said at a June 19 conference in New York. “There were comments that the sky was going to fall on sovereign debt markets. I don’t think we need to worry.”
The sale, carried out a day after the U.S. Supreme Court left intact lower court orders requiring Argentina to pay holders of defaulted debt in full, marked Ecuador’s return to the overseas market five years after halting payments on two bonds. In its offering circular, Ecuador also tweaked the language of a boilerplate clause that Argentina’s holdouts managed to use to press their case.
The lower court agreed with hedge fund Elliott Management Corp. that an equal-treatment, or “pari passu,” provision in Argentina’s bond contracts should bar the nation from treating restructured notes more favorably than defaulted bonds, compelling the nation to choose to pay both in full or neither.
Ecuador’s bond sale came almost a month after hedge fund Greylock Capital Management LLC said the country had agreed to buy back 80 percent of its debt that remained from the default five years ago. Based on Moody’s Investors Service estimates from March, that would have left about $24 million outstanding with holdouts from Ecuador’s multiple debt buybacks.
The South American country hasn’t publicly disclosed how much of the defaulted bonds remain in investors’ hands and at the time didn’t respond to information requests made through the Finance Ministry’s press office.
The notes from Ecuador have returned 2.7 percent since the sale.
New York law is the most widely used legislation for emerging-market debt sold internationally, according to the International Monetary Fund. In a brief supporting Argentina filed to the Supreme Court, Stiglitz warned the decision will “challenge New York’s position as a global financial capital.”
Governments can avoid subjecting their contracts to the U.S. court’s interpretation by changing their wording, like Ecuador did, according to Bruce Wolfson, a lawyer at Bingham McCutchen LLP in New York, who has more than 30 years of experience in emerging-market debt restructurings.
“The parties, if they’re concerned, will negotiate the provision or come to an agreement of what pari passu will mean in that case,” Wolfson said at the same conference. “If that’s done, then this case will not be precedent.”
Ecuador said that its securities will rank equally in terms of priority with the nation’s other external bonds provided that “such ranking is in terms of priority only and does not require Ecuador make ratable payments on the Notes with payments made on its other External Indebtedness.”
Belize and Armenia’s most recent bond sales also specified in their contracts that the U.S. court’s interpretation of pari passu wouldn’t apply to their securities, according to Moody’s.
Ecuador also warned investors that the U.S. court’s decision could make it more difficult for a sovereign debtor to restructure its debts in the future.
The argument echoed the concerns of the International Monetary Fund, and the governments of Brazil, France, and Mexico. In briefs filed to the Supreme Court in support of Argentina’s request for an appeal, the countries argued the case will provide investors with an incentive against agreeing to a debtor’s terms for a restructuring.
Elena Duggar, a group credit officer at Moody’s, said that the impact on restructurings will likely be limited. Since 2003, the vast majority of bond contracts have included collective action clauses, which allow a supermajority of bondholders to bind dissenting bondholders in a restructuring, she said in a telephone interview from New York.
The universe of bonds that could be subject to the same litigation is therefore confined to securities with the same pari passu wording found in Argentine bonds that don’t have collective action clauses, she said.
“It’s very specific to Argentina,” Duggar said. “The court went out of its way to point out it was specific to this particular case.”
Seventy-two percent of the $42 billion in emerging-market sovereign dollar bonds sold this year are governed by New York law, according to data compiled by Bloomberg, compared to 74 percent in 2011.