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Argentina's Bond Mess Gets Slightly More Complicated

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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Today's English court ruling on Argentina's bond struggles is very English. Judge David Richards ruled that Argentina's English-law bonds are in fact English-law bonds, which seems uncontroversial. He was also asked to rule that Argentina should be able to make payments on those bonds, a far thornier question on which he demurred. And he was asked to tell the trustee of those bonds to show a copy of his order to the U.S. court that is currently preventing Argentina from making payments on those bonds. He again demurred:

Finally, the claimants seek an order that the trustee bring the declaration that I have made to the attention of any relevant court before which it appears in the United States. The claimants are critical in some respects of the conduct of the trustee in the US proceedings. I do not propose to enter into a discussion of those criticisms. I am in no doubt that the trustee is conscious of its obligations as trustee but equally it is conscious, as it must be, of the delicate position in which it finds itself as a trustee subject to the personal jurisdiction of the US courts. ...

I do not think that it would assist if I were to give the direction sought. It is a matter for the trustee to decide, with its attorneys, the proper time and way, if at all, to bring this judgment and order to the attention of the US courts.

If I had the power to order someone to show my writing to other people, I would probably abuse it terribly, but this English judge is way more polite and self-effacing than I am.

The judge's order actually has a good clear account of the convoluted background, but I'll summarize quickly; you've probably heard this before. Argentina had some bonds. In 2001, it defaulted on those bonds, and in 2005 and 2010 it exchanged them for new bonds at pennies on the dollar. A few "holdout creditors" did not accept the exchange; instead, they kept the old bonds and sued in a New York federal court. They won, and Judge Thomas Griesa in New York ordered Argentina not to make any payments on the exchange bonds without also paying off the old bonds in full. Argentina refused to do this, and so for the last seven months or so it has been in default on its exchange bonds. 

This has left the exchange bondholders sad and angry. The ones who hold dollar-denominated New York-law exchange bonds are left to stew ineffectually, and to hope for a negotiated resolution between Argentina and the holdout creditors. That resolution seems to be on hold given Argentina's other more pressing scandals. No one seems to expect much until after Argentina's presidential election in October.

But the exchange bondholders who hold euro-denominated English-law bonds can plot to escape Judge Griesa's strictures. Judge Griesa only has power in the U.S., and the payment process for those bonds never seems to travel through the U.S. As I once described it, "Argentina gives the money to a bank in Buenos Aires, which transfers it to a bank in Frankfurt, which holds it in the name of a bank in Brussels, which transfers it to a London nominee for Belgian and Luxembourg clearinghouses, which pays it to bondholders." Right now the money is still in Buenos Aires, and the bondholders want to find a way to move it closer to them.

The nice thing about the places through which the money might pass is that they are probably friendlier to the exchange bondholders than Judge Griesa is. His ruling turns on the pari passu clause in Argentina's old bonds, which says that the "payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness." Judge Griesa ruled that this meant what it said: That Argentina can't pay any other debt ahead of the old, defaulted bonds.

But most people in the sovereign debt world just assumed that the clause did not mean what it says. Certainly no one wanted it to mean that. Future sovereign bonds will word the clause differently, to make it clear that it doesn't prevent payments like the ones Argentina wants to make. And Belgium, whose courts once ruled that the pari passu clause does prevent such payments, has since changed its laws to overrule that ruling. Belgium, where Argentina's euro bonds are cleared, is now a very friendly place for the exchange bondholders.

So if the exchange bondholders could just cut the U.S. out of the equation, they'd have a good chance of actually getting paid and going on with life as normal.  But there's a problem: As Judge Richards puts it, "The one connection with the United States is that the trustee is incorporated under New York law and has its registered office in New York." Bank of New York Mellon, the trustee responsible for all these movements of money from Buenos Aires to Frankfurt to Brussels to London to Brussels again and then to the bondholders, is a New York bank. Its executives are well aware that if they enrage Judge Griesa, he has the power to march them downtown and throw them in jail for contempt. So they are not keen to push the interpretation of what his orders might mean, or where he might have jurisdiction. Trustees are conservative types, and the bondholders' money sits in Buenos Aires.

So the exchange bondholders want to make life uncomfortable for BoNY Mellon in Europe, because they think that right now it's too comfortable doing nothing in New York. This London case was an effort in that direction: The exchange bondholders sued BoNY Mellon in London, asking the court to make some pronouncements that might encourage it to do its job more aggressively.

The first thing that the exchange bondholders wanted the London court to say is super boring, and the court was fine with saying it:

A declaration that the sum of €225 million transferred by the Republic of Argentina to the account of the trustee with Banco Central de la República Argentina and still held to the credit of that account is held on the trusts declared by a Trust Indenture between the Republic as Issuer and The Bank of New York as trustee dated as of 2 June 2005 and subsequently amended, such trust being governed by English law.

In theory I suppose that this declaration protects the money -- held by the Argentine central bank in an account for BoNY Mellon as trustee -- from seizure by the holdout creditors. In practice, no one was really disputing what this declaration says -- basically, that the English-law bonds are governed by English law -- and even Judge Griesa wasn't going to let the holdouts seize the money. So it's a pretty innocuous point.

The second thing that the the exchange bondholders wanted the court to say was that BoNY Mellon's obligations to make payments on the bonds "are unaffected by the New York Injunction," subject to any "defences available under English law." That is: BoNY has to move the money to the bondholders, unless it has a good reason not to. The court refused to grant this declaration, because it would be meaningless. BoNY Mellon might have a defense for its nonpayment (for instance: that it was prevented by U.S. law from moving the money). Or it might not. But without deciding that question, the declaration would be silly:

In my judgment, a declaration which is qualified in these terms, as this declaration must be, serves no useful purpose. It would be, in short, a declaration that the trustee would be in breach of trust unless it had a defence. No-one is assisted by a declaration in those terms. Accordingly, I shall decline to make the second proposed declaration.

The goal of the suit was not to order BoNY Mellon to pay the bondholders. It was to create a piece of paper, which BoNY Mellon and the exchange bondholders could show to Judge Griesa, that might look from far away like an order to BoNY Mellon to pay the bondholders. "Look, judge," they could say, "a court in England has disagreed with you. BoNY Mellon is now caught between a rock and a hard place. Just let it pay the bondholders!" The hard place would have been pretty squishy, really, but it was worth a shot. But Judge Richards declined to create the hard place, on grounds of squishiness.

And he even declined to order anyone to show Judge Griesa the squishy order that he did issue. Of course the exchange bondholders (or BoNY Mellon) are free to show Judge Griesa this order, but it seems unlikely that it would change his mind about anything. It just tells him what he already knew.

On the other hand there is this:

Restructured debt issued under U.K. law reversed earlier losses to gain after the court decision. Euro-denominated restructured debt issued under English law surged 3.9 cents at 3:06 p.m. in London to 91.5 cents on the on euro, their highest since July 2007.

Lawyers for the Euro bondholders said in a statement the London ruling was a “significant step forward in the defense of their interests.”

Is it? I can't see how. Now we know that the English-law bonds are English-law bonds, but we knew that already. I suppose we know that, if English law requires BoNY Mellon to pay the exchange bondholders, English law will require BoNY Mellon to pay the exchange bondholders. But the English court refused even to endorse that proposition definitively. It's pretty weak stuff.

So it seems a little silly for Argentina's euro bonds to rally on this news. On the other hand, I don't know, it's news, right? Something happened, even if it's not much, in a European court. European courts are the best hope for Argentina's bondholders. And this English case is just a warm-up; the real action might be in another lawsuit against BoNY Mellon and Euroclear in Belgium, which has hearings scheduled soon. A Belgian court might well be more aggressive than the English one was in creating a conflict with the New York courts. If it does, then that might make things exciting for Argentina's bondholders again. If not, it's going to be a long slog.

  1. London is more of a lukewarm place. Mr. Justice Richards says that Judge Griesa's "construction is controversial," but sees no reason to opine one way or the other on its substance.

  2. If this worked, it would present long-shot opportunities for a workaround even for the New York-law bonds. Footnote 9 here discusses one potentially clever idea.

  3. See paragraphs 36 ("the trustee does not dispute that it holds the funds received by it on 25 June 2014 on the trusts [sic] of the trust indenture and it does not oppose the making of such declaration") and 39-42 ("No Holdout Creditors have applied to intervene" on this question, though they did send in a weird letter) of the English ruling for the proposition that no one disagrees. And see paragraph 27 for the proposition that even Judge Griesa wasn't going to let the holdouts seize the money, "on the grounds that the euro funds were located outside the United States" and that, even if they were property of Argentina, "a turnover order would constitute an attachment or execution of the property of a foreign sovereign located outside the United States, which is not authorised under the terms of the Foreign Sovereign Immunities Act."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net