| Latin America Emerging Markets Research |
Argentina: US Appeals Court bashes Argentina... as it did in the past prior to ruling in its favor
|
The possibility of anticipating an Appeals Court ruling
looks futile particularly when lack of a precedent means that even legal experts
are unable to use point to legal references to connect or cut the dots presented
by two sides in dispute. Today's hearing for a case between holdout creditors
vs. Argentina over the right interpretation of pari passu is a case in
point.
The judges' bashing of Argentina's defense for ignoring
multiple court orders to pay its remaining defaulted debt is likely to have made
the biggest impression on the public at the hearing. Interruptions and requests
for clarification from the judges targeted at the appellant (Argentina) far
outnumbered those aimed at the plaintiffs (holdout creditors). If this were a
good metric with which to imagine the future ruling then the press is very
likely to convey the impression that markets need to price greater risk of the
Appeals Court delivering an adverse ruling for Argentina.
However, this bashing of Argentina's behavior as a
debtor was also a common thread in other appeals involving Argentina (the
attachment of defaulted bonds in the debt exchange (2005) and attachment of
central bank assets held in the Fed wire (2011). Notwithstanding the scolding,
in both cases the Appeals Court rulings ended up favoring Argentina (and in the
latter case thereby reversing Judge Griesa's district court
ruling).
Putting all the considerations (see below) on the scales
we believe that the litigation will be a drawn out process in which it appears
that Argentina has a modest upper hand. But that upper hand is one that is not
sufficient to completely dispel the uncertainty over a potential future
disruption by holdout creditors of the coupon payments for restructured debt
holders of US law securities.
So what color from the hearing might one point to in
support of this base case scenario ?
First, setting a precedent on purely technical grounds
for a broad interpretation of the breach of pari passu clause seems to be an
undesirable task for the judges which is riddled with challenges.
A
incisive inquiry from the judges as to whether 6 years of non-payment (as
opposed to 6 months) might constituted subordination seemed initially to suggest
the Court might want to sway in on the broad definition in favor of holdouts.
But as the hearing progressed it seemed evident that the less compromising way
to uphold the District judge's injunctions (and hence, favor holdout creditors)
would be to avoid dealing with the ambiguities surrounding a broad
interpretation altogether and instead focus on the narrow interpretation of the
breach of pari passu related to the existence of the Argentina's "lock law". The
judges did seek to clarify if the US government had an opinion on this which the
US chose to avoid - thus, giving the impression that it was not opposing a
narrow ruling regarding breach of pari passu (in contrast to its clear
opposition to a broad ruling, see below).
Alternatively, the least compromising way to explicitly
repeal the broad interpretation of pari passu (and hence, favor Argentina) would
be to accept the understanding of the controversial pari passu clause presented
in the Clearinghouse's amicus brief, assuming its represents adequately market
practitioners' views and conventions. Argentina's defense repeatedly referred to
the Clearinghouse, US government and Bank of England opinions on pari passu as
evidence of how the Court should rule. In struggling to understand whether the
debt exchange subordinated holdout creditors, however, the judges did not choose
to focus on the Clearinghouse opinion. But judges did hear and it seems
reasonable to assume that they were swayed by the US government view against a
broad interpretation of the pari passu breach.
Argentina's defense argued that pari pasu means "equal
rank" as opposed to "equal treatment" and argued that if the Court ruled that
Argentina had to pay holdouts pro-rata then holdout's undiscounted claims (100%
principal + interest) implied "unequal treatment." Yet the judges seem to favor
debating whether to frame the concept of subordination in relation the timing
bond holders get paid (and ignore the amount they got paid). Argentina also
argued that pari passu was meant to avoid the conversion of unsecured
subordinated debt into secured debt, something Argentina did not do through the
exchange or through the lock law.
These considerations suggest that
Argentina has more chances to get off the hook than not but they do not suggest
Argentina is home free at this stage because a potential ruling against
Argentina on a narrow (and convenient) basis cannot be totally discarded. True,
on strictly technical grounds, Argentina's defense argued convincingly that the
lock law reflected a division of democratic powers across Argentine government
rather than a simple unsurmountable obstacle to paying holdouts akin to
subordination). But the lock law seems to offer a scape goat in this complex
litigation too convenient to ignore: upholding injunctions against Argentina
because of the lock law puts pressure on Argentina to address holdout claims in
some fashion while it avoids setting a potentially unsettling precedent
affecting resolution of sovereign debt restructurings.
Second, if this is indeed the base scenario then the
question that might arise is whether the injunctions against Argentina and the
bondholder trustee domiciled in the US constitute an adequate remedy for
plaintiff. In discussing this matter at first glance the judges seem to be
establishing a tie between Argentina and holdouts. On one hand, the judges
repeatedly insisted on distinguishing injunctions awarded from attachments (a
point that can be considered to favor Argentina). On the other hand, the judges
entertained the idea that injunctions did not explicitly oblige Argentina to pay
holdout creditors but simply disallowed Argentina from paying other creditors if
it did not also pay holdouts (a point that can be considered to favor holdout
creditor).
Indeed, the latter plays into the strategy holdouts hope
will give them "leverage" over Argentina because it places the burden on
Argentina to decide what to do: either (A) transfer the cash for restructured
bond payments and face pro-rata of the funds (a default de facto, but less clear
if is a event of default de jure that triggers CDS), (B) not transfer funds to
restructured debt holders and face default (triggering CDS), or settling with
holdouts separately and transferring the payments to restructured creditors
without the pro-rata threat.
Holdout creditors have been arguing that pari passu does
not threaten other bondholders since Argentina has the capacity to pay both
creditor classes and - if given the injunctions - the incentive to do so.
Interestingly Argentina seemed to score a point in terms of considering that
capacity to pay could not be related to its $46 billion of reserves because
these reserves had been protected by a prior Appeals Court ruling on the grounds
of the Foreign Sovereign Immunities Act.
What does all this imply? Hard to
say except that it raises a doubt as to whether injunctions are worthwhile
justifying and awarding. Note that it does seem to make sense for Argentina to
offer to repeal the lock law as an alternative remedy to injunctions. But in the
hearing Argentina did not do so (preferring to argue why the lock law
technically did not violate pari passu) nor did the judges (they would not be
inclined to do something akin to explicitly request another country change its
laws). But it remains worthwhile to recall that the law was effectively
suspended for a year in 2010 and has already achieved its original purpose
(inducing a high 92% investor acceptance of the restructuring) leaving Argentina
with little need to defend its existence.
Third, it seemed that confronted with the question of
the effectiveness of injunctions as a remedy, holdout creditors anticipated
their potential strategy to the Court in a way that might not be supportive of a
ruling in their favor. Although plaintiffs argued that the injunctions would be
complied by Argentina due to their potential effect on market access or
diplomatic relations, they also mentioned that they could use them to go after
financial institutions that assist Argentina in being in contempt of court, in
this case the bondholder trustee (Bank of NY). Argentina, of course, argued that
money held by a trustee in US jurisdiction was not Argentina's and that money
used to transfer funds to the bondholder trustee was spared attachment by the
Foreign Sovereign Immunities Act..
Evidently this implies that the
outstanding litigation would not necessarily solve the issue at hand but instead
further increase the burden of more lawsuits faced by the courts, a scenario
that the Court might not sympathize with.
|
|
(1-212)
834-4144
J.P.
Morgan Securities LLC
|
Keine Kommentare:
Kommentar veröffentlichen