Argentina's Bonds Are Doing So Well, It Tried to Sell More
A lot of investors own Argentine bonds and are not getting paid interest on those bonds. That seems bad for those investors, and for Argentina, and is generally a big mess. Where there's a mess, there's an opportunity, and somehow it seems like the opportunity here is for Argentina to sell more bonds and for investors to buy them? I guess? It is not the most intuitive solution.
In any case, this week JPMorgan and Deutsche Bank were marketing $2 billion of new Argentine bonds to investors, and were apparently finding potential buyers. That sale was, um, "suspended" yesterday because of legal troubles. In the background, of course, there is an enormous set of legal troubles. Judge Thomas Griesa, a federal judge in New York, has ordered Argentina not to pay interest on its bonds until it pays off some holdout creditors, including Paul Singer's NML Capital, who have successfully argued that payments on the other bonds would violate Argentina's obligations to treat their bonds equally -- pari passu -- with the other bonds. 1 Argentina won't pay the holdouts, and so its other bond payments are in an indefinite limbo.
But the immediate set of legal troubles is just that NML was trying to get documents and depositions from Deutsche Bank and JPMorgan about the current bond sale, and Deutsche and JPMorgan seem to have been ignoring NML. And late on Wednesday, Judge Griesa put a stop to that, ordering the banks to produce documents and witnesses pronto. The deal was quickly suspended, which suggests that what those documents and depositions reveal, and what Judge Griesa has to say about them, will determine whether Argentina can issue the new bonds.
The new bonds, in theory at least, are Argentine-law bonds issued in Argentina (and denominated in dollars). Obviously the purpose of that choice was to avoid Judge Griesa: He can make a lot of trouble for Argentina, but his troublemaking ability doesn't extend to events happening entirely within Argentina. So what trouble could he make for these bonds? I think that comes down to three questions.
1. Are these new bonds subject to pari passu?
The first question is whether Judge Griesa would want to prevent Argentina from paying interest on the new bonds, if they're issued. 2 Judge Griesa's 2012 order bars Argentina from making payments on a group of bonds called the "exchange bonds." These are bonds issued mostly under New York and English law. 3 There are also, though, a lot of "exchange bonds" issued under Argentine law but denominated in dollars. It is not clear whether Argentina is allowed to pay them. That is being litigated right now. There's a hearing next week. Here is Argentina's brief, and NML's, and Citibank's. (Citibank is the trustee of those bonds, and is in hot water with Argentina if it doesn't make the payments on those bonds.)
The issue is that the pari passu clause requires NML's bonds to rank equally with all "External Indebtedness," which excludes "Domestic Foreign Currency Indebtedness." Argentina can do whatever it wants with DFCI, as everyone calls it. Now, from those words, it sounds like Argentine-law, U.S.-dollar bonds would be "Domestic Foreign Currency Indebtedness." However, there is a definition of that term that is long and boring and disputed, but the upshot of it for our present purposes is that DFCI has to be debt that is "offered exclusively within the Republic of Argentina." 4
So are they? That is sort of a metaphysico-legal question. Where does anything happen, in this electronic age? There is no question that the bonds are being offered to non-Argentine investors by bankers located outside of Argentina. The "big boy letter" that investors were asked to sign to invest in the bonds -- in addition to a somewhat over-the-top waiver of any liability for Deutsche Bank and JPMorgan if things go pear-shaped 5 -- includes representations for European Union and U.K. investors, and a statement that the bonds will be cleared through the European clearinghouses Euroclear and Clearstream. Also it comes from the London offices of those banks. So that sure sounds like the bonds are being offered outside of Argentina, and are thus not DFCI, and are thus subject to the pari passu order.
On the other hand, in the sovereign debt world, things are not always what they sound like. Here is some magic: 6
Indeed, all Argentine Law Bonds, including those issued in the exchanges, were offered exclusively in Argentina. Section (iii)(a) defines “Domestic Foreign Currency Indebtedness” by reference to where the “indebtedness” is offered, not to whom it is advertised. The Republic’s “indebtedness” is represented by global notes, and all of the global notes for the Argentine Law Bonds are deposited in Argentina at CRYL. Cf. Aurelius Capital Partners, LP v. Republic of Argentina, No. 07 Civ. 11327, 2010 WL 2925072, at *3-4 (S.D.N.Y. July 23, 2010) (“the situs of the Trust Bonds is Argentina” because “they were deposited, in an ordinary commercial sense, at Caja de Valores in Argentina,” even if the intangible “beneficial interest[s]” in the bonds were located in the United States).
The way bonds work -- the way everything works! 7 -- is that they're deposited with a depository/clearinghouse in the form of a global note, and then everyone just deals with the clearinghouse. You don't own bonds, you own beneficial interests through a clearinghouse. Here, roughly, the clearinghouse is Caja de Valores, which in turn owns a beneficial interest in the bond deposited at the depository, CRYL (the Central de Registro y Liquidación de Instrumentos de Endeudamiento Público). CRYL and Caja are in Argentina. The bonds are only sold to CRYL, locally. Of course foreigners might have beneficial interests in the bonds through Caja. (Or, in Europe, they might have beneficial interests through Euroclear, which would have beneficial interests through CRYL; you can stack clearinghouses.) But that doesn't affect where the bonds were offered. The bonds were sold by Argentina to CRYL, and that was that. It all happened locally.
Or that's the argument. I am not really an expert in this, but here is a heuristic:
- The sovereign debt world tends to like the less literal readings of words, meaning that many sovereign-debt people would think that bonds sold in Europe can still be "offered exclusively within" Argentina.
- Judge Griesa, not being a sovereign-debt guy, tends to like the more literal readings of words, so he might have some trouble with that notion.
This heuristic is, again, not based on deep expertise, but it is based on the pari passu clause. That clause sounds like it says Argentina can't pay anyone else without paying off NML first, but no one thought it meant that, until Judge Griesa said it did. One could imagine him doing the same here.
So! There's a decent chance that, if these new bonds were issued, and NML asked him to, Judge Griesa would decide that they were "External Indebtedness," and that they were subject to the pari passu clause. 8 And then, if asked, he might well expand his order to forbid Argentina from paying any interest on these bonds.
Just think about the dynamics here. NML asked for depositions and documents from Deutsche Bank and JPMorgan to find out where they're offering the bonds. Judge Griesa ordered DB and JPM to give NML that discovery. That discovery is going to come up with a mess of evidence that, yes, these bonds are being marketed in Europe. You could see Judge Griesa getting annoyed at Argentina's hypertechnical reading of what "offered exclusively within" means. And you could see him reading the big-boy letter that JPMorgan and Deutsche Bank used in marketing the bonds -- which actually says that investors maybe unable to get paid because of Judge Griesa's injunctions! -- and saying, yep, let's make that happen.
2. If they are subject to pari passu, can Judge Griesa do anything about it?
But that wouldn't resolve the issue, because Judge Griesa can't make things happen just by saying them. Or, I mean, not always. For instance, he can tell Argentina to stop making payments in Buenos Aires on its Argentine-law bonds, but he's not gonna get on a plane to Buenos Aires to stop those payments. Argentina can ignore him. On the other hand, he can tell Citibank to stop making payments in Buenos Aires on the Argentine-law bonds, and that puts Citibank in a pickle, because Citibank is in New York (where its officers can be thrown in jail for contempt by Judge Griesa) and simultaneously in Buenos Aires (where its officers can be thrown in jail by the Argentine government).
So if Judge Griesa does try to block payments on the new bonds, the next question would be, what can he do about it? In practice, that means: Does the payment process on the new bonds go through his jurisdiction in New York? If so, he can cut off whatever part of the payment process he can get his hands on. If not, he can get as mad as he wants at Argentina, but he can't stop it from paying interest.
A quick summary of the situation so far: If the bonds are issued only in Argentina, they're good to go. If they're issued outside of Argentina, that might anger Judge Griesa, but if they never touch New York he can't do anything about it. If they touch New York, they're hosed. Here's a diagram:
So do they avoid New York? Kind of? As far as I can tell, the payment process goes Argentina to CRYL to Caja de Valores (maybe to Euroclear/Clearstream) to bondholders. There's no trustee -- the bonds are created by legislation, so there's no indenture and so no indenture trustee -- and CRYL and Caja are in Argentina. Euroclear and Clearstream are in Europe. No one's in New York.
So that might work, especially for investors (or their custodians) who have accounts directly at Caja de Valores, and who never need to leave Argentina to get their money. On the other hand, Euroclear has a New York office, and even if the money never moves through New York, you could imagine Euroclear being nervous about staying on Judge Griesa's good side. More generally, you could imagine a lot of investors being nervous about buying bonds if a U.S. federal judge declares it illegal for the issuer to pay those bonds, even if he can't practically do much about it. It's not a great risk-reward proposition.
3. Are these new bonds a way around the judge's order?
You know who else has a New York office? JPMorgan. A big one, with its chief executive officer in it. Deutsche Bank has a lot of people in New York too. So if Judge Griesa issued an order to JPMorgan and Deutsche Bank to the effect of, "cut it out," it would be inconvenient for them to ignore him.
Could he do that? It's fine to help Argentina sell bonds: Judge Griesa's order bars Argentina from repaying its bonds, not from issuing new ones. On the other hand, it also bars Argentina's agents from "aiding and abetting any violation of this ORDER, including any further violation by the Republic of its obligations under Paragraph 1(c) of the FAA," that is, the pari passu clause. So if Judge Griesa's answer to question 1 -- would new bonds violate pari passu? -- is yes, and the answer to question 2 -- can he stop payment on the new bonds? -- is no, then arguably helping Argentina issue the new bonds is a violation of the order. And he has some history of ordering people to cut it out when they try to help Argentina evade his rulings by moving its debt into Argentine law.
Here's NML on the matter:
“We are dismayed that JPMorgan and Deutsche Bank are participating in the schemes of an international scofflaw, schemes which we believe are an attempt to evade the court-ordered enforcement of bondholders’ rights,” NML said Wednesday in an e-mailed statement.
Obviously they have their own biases, but on the other hand that paragraph sounds a little like something Judge Griesa might think too.
Honestly what were JPMorgan and Deutsche Bank thinking? I mean, they "crafted the new bond sale in a way they thought would conform to Judge Griesa’s directives," and I think they have some pretty good arguments for that view. But, like, pretty good. Not a slam dunk. And Judge Griesa does not seem particularly inclined to be generous to Argentina these days. I don't love their odds of actually getting this deal done. And it seems like a lot of work, and a lot of risk, to take on if the deal never happens.
My most recent summary goes like this:
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.
But you can go back recursively, there are a lot of summaries. Footnote 2 here is probably the clearest.
They're not exactly new -- they're a reopening of an existing series of 8.75 percent bonds due in 2024 (referred to as "Bonars") -- but, you know, these particular bonds will be new. Obviously the questions here will to some extent be applicable to the existing 2024 Bonars too.
There are some Japanese yen exchange bonds, which I presume are under Japanese law, though I'm not sure.
Pages 11-12 here have the full DFCI definition, and much of next week's dispute centers on clause (ii) -- that is, the Citi bonds were partially issued in exchange for specific identified bonds, and partially not, and so the issue is whether they should or shouldn't count as "issued in exchange, or as replacement, for the indebtedness referred to" in that list. But for the new cash-issued bonds that JPMorgan and Deutsche Bank were marketing, that doesn't apply, so you're left with (iii)(a), the "offered exclusively within the Republic of Argentina" exception.
I mean, people find it a little over-the-top, but as a former lawyer and former capital markets banker, I am Team JPM/DB on this. I'd have written an even sillier letter if I were them. You have no idea what will happen! It's Argentina! And Judge Griesa! You can't really hold the banks responsible for whatever crazy thing goes wrong.
As set forth above, indebtedness is offered where it is located and can be acquired. Here, it is undisputed that the Global Certificates representing each series of the Argentine Law Bonds, including for those amounts issued in the Republic’s restructurings, have at all times been deposited with, registered in the name of, and cleared and paid through CRYL in Argentina. Further, and as set forth in detail above, the mechanics of the transaction in which a bondholder could tender beneficial interests in exchange for Argentine Law Bonds establish that such indebtedness could only be acquired, and thus was offered solely, within the Republic. Finally, numerous additional characteristics of the Argentine Law Bonds, including their ARARGE prefix and their lack of any consent to foreign jurisdiction, a pari passu clause, or a tax gross-up provision, all establish their domestic Argentine nature.
Obviously NML hotly disagrees; see pages 13-25 of its brief.
You know, DTCC, etc.
Importantly, the issue for the Citi Argentine-law exchange bonds that will be heard next week is different -- there are other arguments that those bonds are DFCI besides the question of where they were offered -- and I don't really have a view on how that would go.
Also note that citation in the Citi brief in the text: In 2010, Judge Griesa wrote that the Argentine bonds were "in" Argentina. But that was for purposes of whether Aurelius could seize them, not for purposes of where they were offered.
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