Argentina Lost! Elliott Won! Pari Passu Rules! (... or Why I Love Being a Law Professor ...)
The pointy-head caucus can exhale -- the Second Circuit ruled on the pari passu drama, and it did not go as I had expected. Not only did the court rule against Argentina, but it did so on relatively broad grounds, giving a fair amount of meaning to a massively indeterminate bit of Latin, and ignoring the practical challenges of enforcing the ruling. The judges upheld the injunction directing Argentina to pay holdout creditors who refused to participate in its 2005 and 2010 debt exchanges whenever it services the new bonds that came out of the exchange. Ironically, the opinion acknowledged that it was impossible to figure out what proportionate payment would mean under the circumstances, but chucked the question back at the lower court. The judges also remanded the question of how exactly one might enforce this injunction without attaching sovereign property abroad or dragging in third parties (New York banks moving Argentina's money), despite the fact that the holdouts admitted in court that their next step would be to go after the banks on aiding and abetting theories. But these are all questions for another day. Between this ruling and the Ghana boat mess, October 2012 will go down as a heady month for Elliott and its kind.
Here are my main take-aways so far:
- The court did not anchor its interpretation of the pari passu clause in Argentina's Lock Law, which bars the government from paying the holdouts, though the law got plenty of play. This was both risky and smart. It was risky because the court's reasoning might be construed to suggest that securities disclosure telling prospective holdouts that they would not be paid was tantamount to payment subordination. It was smart because a decision based solely on the Lock Law could be made moot by its repeal. I bet the "Risk Factors" sections of sovereign prospectuses are getting a close read just now.
- The court adopted wholesale Elliott's reading of Argentina's two-part pari passuclause -- "[t]he Securities will constitute . . . direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu without any preference among themselves. 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 ..." (court's emphasis) -- effectively to punish Argentina for payment discrimination, whether or not it had subordinated the securities themselves. This is a big deal for two reasons.
- First, violating the pari passu clause just got much easier, though I am not sure how far we can take the implications. Would missing a payment to one creditor while paying another amount to a distinct violation, and give the aggrieved creditor specific performance? This will depend on the precise wording of the clause, but the range of possibilities is considerably wider.
- Second, contract drafters have a great new reason to let go the boilerplate schtick. Of course no one will start drafting each word from scratch. But this panel's textualist reading, interpretation technique straight out of Contracts textbooks, and its skepticism of Argentina's evidence on market custom, should jolt the contract production process. Not all bad.
- The U.S. government got no love whatsoever. This could be because of the United States' awkward position of avoiding the Lock Law (still the right thing to have done, in my view), its pale oral argument, or because the opinion seemed determined to bracket its enforcement and policy implications. The goal was to bolster contracts and punish very bad debtors. So what if there is no way of enforcing the injunction without grabbing offshore property or New York banks--we are just telling Argentina what to do. So what if Greece has holdouts--its contracts are not under New York law. So what if the reading seems to cover international organizations -- creditors say they are not after them.
- The opinion mentions Collective Action Clauses twice as both important, and a meaningful bar to future pari passu litigation. This is completely, totally, unambiguously wrong for all the reasons I have given before, and I cannot believe the judges did it when they did not have to. On the bright side, it gives me and my buddies more to write about.
- This may not be as radical as it seems. Everyone would acknowledge that Argentina is an extreme case of vocal intransigence, even by defaulting sovereign standards. In another extreme case last summer, an English judge put an outer boundary on the use of exit consents in distressed debt exchanges. While initial reporting (mine included) suggested that this might seriously damage an established restructuring technique, later analysis suggested more of a modulation. I have said in the past that whatever pari passu means, Argentina is the closest I have seen to breach. Well, now a court says it too, if a bit more strongly than I would. Is it open season on sovereigns via pari passu, consequences be darned? I doubt it.
- It is not over by a long shot. Apart from all the decisions that still have to be taken by the lower court on remand (which could end up gutting the injunction), Argentina will surely appeal. It will ask the full circuit to hear the case, and if it loses again, it will try to go to the Supreme Court. Much excitement to come, with lots of law to be made.
If I were Argentina, an agent bank, or much of the sovereign establishment, I would be shocked and dismayed. If I were Elliott, I would be dancing the jig. As it stands, I am looking forward to some really interesting law and policy developments to come.
1) If by some act intermediary banks are in fact forced to follow the injunction, forcing Argentina to make a pro-rata payment to holdouts in order to continue servicing their performing debt, doesn't this mean that it constitutes an event of default on the currently performing debt? If memory serves me correctly, the exchange bond prospectus says that Argentina is not allowed to give holdouts a better offer than what it initially offered everybody. Does this matter at all to the courts?
2. What would the timing look like for an injunction to be enforced, assuming that the Second District affirms whatever Griesa comes back with? This case has dragged on for a while but I wonder if we might see an unravelling within the next year or so.