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Argentina's New Attitude Pays Off in Bond Fight

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Argentina's long fight over its sovereign debt restructuring seems to be barreling toward a resolution after U.S. District Judge Thomas Griesa issued a ruling on Friday that was very favorable for Argentina. The ruling includes this passage, which makes it sound a little like the whole 15-year ordeal was just a dream :

It is important to recall that the plaintiffs had no absolute legal right to the injunctions. An injunction is an extraordinary measure that is not normally available for breach of contract. The pari passu clause never required the equitable relief that the plaintiffs requested and the court granted. Rather, the court exercised its inherent equitable power to fashion a remedy for the Republic’s breach of the plaintiffs’ contractual rights. In short, the injunctions were a discretionary remedy, not a legal entitlement.

A quick refresher: Argentina defaulted on its bonds in 2001. It offered bondholders the chance to exchange into new bonds in 2005 and 2010, at about 30 cents on the dollar; holders of 93 percent of the old bonds eventually took the exchange offers. But some bondholders -- we call them "holdouts," and they most famously include NML Capital (a unit of Paul Singer's Elliott Management) and Aurelius Capital -- refused the exchange offers, and held on to (or acquired) old bonds. Those old bonds -- we tend to call them the "FAA bonds" -- contained a "pari passu" or "equal treatment" clause saying that Argentina's obligations under those bonds would "at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness." The holdouts sued in Judge Griesa's court in New York, arguing that this clause meant that Argentina could not make any payment on the new bonds -- we tend to call them the "exchange bonds" -- without also paying off the holdouts' FAA bonds in full.

Judge Griesa agreed, and issued an injunction preventing Argentina from paying off the exchange bonds while it wasn't paying the holdouts. Courts had previously issued judgments to some holdout bondholders, ordering Argentina to pay them, but these judgments had a flaw, which is that Argentina ignored them. But Argentina couldn't ignore Judge Griesa's injunction not to pay the exchange bonds, because it turns out that the only practicable way for it to pay the exchange bondholders was to send money through banks and intermediaries in New York. Judge Griesa is in New York, and could keep an eye on those banks and intermediaries. He ordered them not to help Argentina pay its exchange bondholders, and those intermediaries chose, for the most part, not to mess with him.

And so, about a year and a half ago, Argentina defaulted on its exchange bonds: It couldn't pay them without paying the holdouts in full, and it didn't want to pay the holdouts, so it stopped paying interest on the exchange bonds. Argentina's government complained bitterly, and in personal terms, arguing that the default wasn't Argentina's fault but Griesa's. In Argentina's view, it was perfectly willing and able to keep paying its exchange bondholders, and nothing prevented it from doing so except an arbitrary decision of a single judge. Griesa and the holdouts, on the other hand, would say that this was a problem of Argentina's own making: It had promised to treat the FAA bonds as well as it treated any other bonds, so it couldn't keep servicing the new exchange bonds while not paying the FAA bonds. It says it right there in the contract.

Friday's ruling suggests that Argentina had a point. The terms of its debt contracts didn't require a New York federal judge to force Argentina back into default on its new debts. That's just something that the judge thought was a good idea.

But he doesn't anymore. Since Argentina's default in 2014, a new government has been elected. After years of offering holdouts the same 30 cents on the dollar that it offered in the 2005 and 2010 exchange offers, Argentina is now offering a much better deal -- at least 150 cents on the dollar (to account for years of missed interest), and in some cases considerably more.  Holders representing about 14 percent of the FAA bonds have accepted the deal, though NML and Aurelius haven't. As a reward for this better attitude, Argentina asked Judge Griesa to lift the injunction and allow it to go back to paying its exchange bondholders. 

And on Friday he said yes, or just about. Judge Griesa didn't lift the injunction, in part due to a technicality, and in part because his decision to lift it is conditional and requires Argentina to show its good faith by repealing its laws against paying off the FAA bonds and by making the agreed payments on settlements that it reaches with holdouts by Feb. 29. But he made clear that he would lift the injunction if those conditions are met.

On the one hand, this is strange. On the face of Judge Griesa's ruling, Argentina can pay off the 14 percent of the FAA holdouts it has already settled with and then resume payments on its exchange bonds without giving the remaining holdouts a cent. Those holdouts have spent a decade fighting for a deal with Argentina, and Judge Griesa's injunction is pretty much the only leverage they've ever had. It worked, and Argentina is finally negotiating. And now Judge Griesa is going to take that leverage away? The holdouts should probably settle pretty quick:

“We expect many more funds to accept the offer now as they are losing much of their bargaining power,” said Jane Brauer, a strategist at Bank of America Corp. in New York. “We’ve been overweight Argentina in anticipation that a settlement might take place in the next four to five months, but this is going faster than we expected.” 

Or as the holdouts themselves put it, "The message to non-settling plaintiffs -- many of whom have had no opportunity to negotiate with anyone -- is unmistakable: Settle by February 29, or else."

On the other hand, though ... maybe they should settle pretty quick? Argentina is offering the holdouts well more than 100 cents on the dollar, for bonds that many of them bought for pennies. You could see how someone might think -- how Judge Griesa might think -- that holding out for more would be a little piggish.

And the holdouts' position has some problems. As I characterized it the other day, the holdouts' view seems to be that as long as Argentina is violating its equal-treatment obligations -- as long as any FAA bond hasn't been paid off in full and with full interest -- then any FAA bondholder can demand and receive an injunction preventing Argentina from paying anyone else. This would mean that NML and Aurelius could keep Argentina out of the capital markets indefinitely: If they are not happy with Argentina's current offer of about 72.5 percent of all the principal and interest that they are owed, they can just hold out indefinitely for more, and Argentina can never pay anyone else while they wait. And some of the holdouts' bonds seem to be accruing interest at 101 percent a year, which may reduce their hurry to settle.

Then there is the problem of "me-too" claimants. NML and Aurelius have fought Argentina for years, taking a lot of risk and doing a lot of work to put themselves in the situation they're in today. Their stated plan has long been to reach a fair settlement for something less than 100 percent of all the principal and interest that they are owed. But there are other bondholders who also own pari passu FAA bonds, and who are not part of the NML/Aurelius group. Those bondholders could, and did, join the case against Argentina pretty late in the game. But if you take the logic of the pari passu clause seriously, any FAA bondholder -- even one holding just $1,000 worth of bonds -- can hold up all payments, not just to the exchange bondholders, but even to other FAA bondholders who settle. Even if NML and Aurelius reached an amicable and judicially approved settlement with Argentina for 90 cents on the dollar, a me-too holdout could show up and demand that Judge Griesa block all payments until that holdout got paid in full. But of course Judge Griesa could say no: The original injunction provided leverage for a settlement, but allowing anyone the same injunction indiscriminately could block a settlement.

And as Judge Griesa writes, the injunction is an equitable remedy, not an absolute requirement. It makes sense that he would use the injunction to encourage what he thinks is a fair outcome, and lift the injunction once that outcome has been achieved. When Argentina was unilaterally offering 30 cents on the dollar, and saying mean things, Judge Griesa got fed up and cut Argentina off from the U.S. payment system. Now that Argentina is offering more than 150 cents on the dollar, and being much friendlier about it rhetorically, Judge Griesa is on its side. When he thought Argentina's offer was too low, he used his powers to force Argentina to offer more; now that he thinks Argentina's offer is fair, he will use his powers to force the holdouts to accept it.

Though that isn't what he says. In fact, Judge Griesa says explicitly that he "takes no position on the reasonableness" of Argentina's current offer: His change of heart is based only on "the Republic’s earnest efforts to negotiate and its striking change in attitude toward settlement since President Macri assumed office."  I don't know, though. Argentina was perfectly willing to settle in 2014: Its then-economy minister came to New York, sat at the table, and offered 30 cents on the dollar. Hey, it's an offer. Argentina is willing to settle now, but NML and Aurelius, at least, have argued that its offer is almost as unilateral, non-negotiated and "take-it-or-leave-it" an "ultimatum" as the 2014 offer was. The rhetoric has softened, and there have been at least a few hours of negotiations, but the most obvious change is that Argentina's current offer is so much bigger

One lesson that people often take from the Argentine debt fight is that the world needs a sovereign-debt bankruptcy mechanism. The Bloomberg View editorial board recently called for such a mechanism, "ideally overseen by the International Monetary Fund." But one lesson to take away from Judge Griesa's decisions is that this is a sovereign-debt bankruptcy mechanism, sort of. Bankruptcy, like the injunction here, is essentially a matter of equity.  Bankruptcy isn't about enforcing the terms of contracts as written; it is the opposite. It is about figuring out a resolution of claims that is fair to all creditors in a world where the contracts have failed and there isn't enough money to go around.

The dream is to be able to do that in a predictable, law-y sort of way, with defined orders of payment priority and binding votes among creditors. But in practice a lot of what goes on in bankruptcy is negotiation in the shadow of those rules, or just convincing a bankruptcy judge that what you want is fairer than what the other side wants. Absolute priority rules make sense in liquidation: If there's $X to go around, then you give it to the most-senior creditors, then to the next-most-senior, and so on until you run out of money. You can't liquidate a country, though, so priority rules can't resolve a sovereign bankruptcy. Voting by creditors is a reasonable enough way to resolve a lot of bankruptcies, even sovereign ones, but it is open to gaming and coercion.  Argentina, after all, got 93 percent overall participation in its 2005 and 2010 exchange offers; the holdouts have argued all along that those offers were coercive, and that their 93 percent approval didn't mean that anyone thought they were fair.  

So Argentina and its holdout bondholders ended up with a bankruptcy-ish process that is messy and vague, but not entirely unfamiliar: They went in front of a judge, the judge told them to negotiate, and then he used his powers to force them to a result that he figured would be more or less fair, punishing each side in turn as he concluded they were being unreasonable. It took a long time and a lot of heartache, and it isn't necessarily a process that a country concerned with its sovereign dignity would choose to go through. (Though: Argentina did choose to subject its bonds to New York law and jurisdiction. ) A process more specifically and thoughtfully designed for sovereign-debt restructuring, perhaps one overseen by the IMF, might be more dignified and efficient. But it too might come down to a judge forcing the parties to negotiate until they reached what he thought was a fair result.

  1. Citation omitted. 

  2. Named after the 1994 Fiscal Agency Agreement that defined the terms of the old bonds.

  3. It's clause 1(c) of the FAA, if you're following along for some reason.

  4. In a related vein, Judge Griesa writes about the exchange bondholders:

    The court has repeatedly voiced its concern about the exchange bondholders’ plight. Hr’g Tr. 11, NML Capital, Ltd. v. Republic of Argentina, No. 08-cv-6978 (S.D.N.Y. Aug. 21, 2014) (bemoaning the injunctions’ collateral damage to “very innocent third parties”); Hr’g Tr. 15, NML Capital, Ltd. v. Republic of Argentina, No. 08-cv-6978 (S.D.N.Y. Aug. 8, 2014) (“[S]ettling this case . . . will assist real human beings.”).

    As Anna Gelpern notes, "the bemoaning really helped." Judge Griesa's order, entirely predictably, cut off interest payments to the innocent exchange bondholders for a year and a half (and counting). But he feels bad about it. 

    Incidentally, this reminds me of another passage from another Judge Griesa opinion that I quoted almost a year ago, about how Judge Griesa could forbid Citibank from assisting Argentina in making some payments on some bonds even if those bonds aren't subject to the pari passu clause. Back then, Judge Griesa concluded that his power to order Argentina around wasn't limited by the terms of the debt contract. Now, he is concluding that his orders to Argentina weren't required by the terms of that contract either.

  5. The specific deal is basically the greater of:

    • 150 percent of principal, or
    • 72.5 percent of your claim (including principal and accrued interest).

    For holdouts with claims of less than 150 percent of par, like Dart Management, this represented a windfall. For holdouts with claims of more than 1,000 percent of par -- which describes some of NML's claims -- it represents, I don't know, arguably still a windfall? But less than they wanted.

  6. Specifically that some of the injunctions are up on appeal before the Second Circuit. If you are interested in this particular technicality, see pages 17-18 of the holdouts' motion here. There are signs that it may vanish soon, as Argentina -- which had appealed the injunctions -- has asked to dismiss its own appeal.

  7. Argentina has some statutes preventing it from paying any more on the FAA bonds than it originally offered in the exchange. From Friday's ruling:

    To buttress the first exchange offer, the Republic enacted Law 26,017— the “Lock Law”—which prohibited “any type of in-court, out-of-court or private settlement” with FAA bondholders who could have participated in the exchange offer but chose not to. Then, in 2009, the Republic enacted Law 26,547, which barred the Republic from giving FAA bondholders who had filed lawsuits “more favorable treatment than what [was] offered to those who have not done so.” Finally, in 2013, the Republic passed Law 26,886, which again forbade bondholders who had filed lawsuits from getting any settlement worth more than the prior exchange offers.

    Argentina would need to repeal those laws to make good on the settlements it has already reached, and it plans to repeal them, so this condition shouldn't be a big holdup.

    The weirder condition is that Argentina needs to make payments on its settlements in order to get the injunction lifted. This is weird because at least one of those settlements is itself conditioned on the lifting of the injunction. So Argentina won't pay the settling holdouts before Judge Griesa lifts the injunction, and Judge Griesa won't lift the injunction before Argentina pays the settling holdouts. I assume this problem is trivially solvable -- just close your eyes, count to three and do everything at once -- but it does not seem to have been solved.

  8. Which is itself weird enough; why does a U.S. judge get to pass judgment on the "attitude" of a foreign country's elected governments?

  9. I mean, that's what they tell you in law school, and on Wikipedia, though there are counterarguments. Obviously the term "equity" in Anglo-American law has a somewhat different sense from the colloquial usage.

  10. We talked a while back about some proposed International Capital Market Association rules to resolve sovereign defaults, which offered multiple voting mechanisms, all of them possibly gameable.

  11. On the other hand, now the holdouts are suggesting that the 14 percent takeup of Argentina's current settlement offer means that it's not fair -- which may be right, or may just reflect the coercive power of Judge Griesa's injunction.

  12. That's sections 22 and 23 of the FAA.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net