United States: Sovereign Debt Update - July/August 2014

Last Updated: October 8 2014
Article by Mark G. Douglas

The long-running dispute over the payment of Argentina's sovereign debt has been particularly active in recent months and weeks.  On June 16, 2014, despite the Republic of Argentina's warning that it may once again be forced to default on its sovereign debt, the U.S. Supreme Court denied Argentina's petition seeking review of lower court rulings that:  (i) construed pari passu, or equal footing, clauses of a bond indenture to prohibit Argentina from making payments to bondholders who participated in 2005 and 2010 debt restructurings before it pays $1.4 billion to holdout bondholders (see NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012)); and (ii) upheld a lower court's order directing Argentina to pay holdout bondholders $1.4 billion (see NML Capital, Ltd. v. Republic of Argentina, 727 F.3d 230 (2d Cir. 2013)).  The Court also denied certiorari in a related appeal by certain non-party bondholders (Exchange Bondholder Group v. NML Capital Ltd., No. 13-991).

Argentina's economy minister announced on June 17, 2014 that, in an effort to continue meeting Argentina's obligations to creditors who participated in the country's previous debt restructurings (the "exchange bondholders"), the government is taking steps to execute a debt swap governed by Argentine law.  In response, U.S. District Court Judge Thomas Griesa, who originally ordered Argentina to pay the $1.4 billion to holdout bondholders on November 21, 2012, directed Argentina at a hearing held on June 18, 2014 to comply with his previous orders before it could make a $900 million payment on June 30 to its exchange bondholders.  Representatives from the Argentine government later announced that they would meet with the holdout bondholders, including NML Capital and Aurelius Capital, in an effort to negotiate a settlement.

On June 20, 2014, Argentine President Cristina Kirchner stated in a nationally-televised speech that her government wants to reach a settlement with the holdout bondholders, but only if U.S. courts create the right conditions for negotiations.  On June 23, 2014, Argentina asked District Court Judge Griesa to suspend rulings directing the country to pay holdout bondholders so that the parties can engage in settlement talks.  According to Argentina, paying $1.4 billion to holdout bondholders when it makes the next regularly scheduled payment on its restructured debt would wipe out half its cash reserves due, among other things, to a "right upon future offers" clause in the exchange bond indentures  Later that day, Judge Griesa appointed a special master to preside over the negotiations.  On June 24, 2014, holdout bondholders objected to the Argentine government's request for additional time to negotiate a deal, saying a delay would only give the country more time to launch a plan to evade the judge's orders.

On June 26, 2014, Judge Griesa issued an order rejecting Argentina's request to suspend his ruling directing the country to pay holdout bondholders at the same time it pays exchange bondholders.  "Such a request is not appropriate," Judge Griesa wrote, explaining that "[t]he injunctive relief ordered by the court (dealing with the pari passu issue) does not even come into play unless the Republic makes payments to the exchange bondholders."  He further stated that "[t]he court has no control over whether or not the Republic makes such payments."  Earlier that day, Argentina announced that it deposited $539 million into trustee The Bank of New York Mellon Corp.'s ("BNY Mellon") accounts for the purpose of making interest payments on its exchange bonds.

In a court hearing on June 27, 2014, Judge Griesa ruled that Argentina's attempt to pay $539 million to exchange bondholders without paying holdout bondholders is illegal and ordered BNY Mellon to return the money to the Argentine government.  The judge characterized Argentina's bid to pay exchange bondholders as "disruptive" and warned banks against facilitating any such payment.

On June 29, 2014, investment firms that hold restructured euro-denominated bonds issued by Argentina filed a petition seeking a ruling from Judge Griesa that foreign banks which process interest payments on such bonds are outside the jurisdiction of U.S. courts.  The investment firms contend that the euro-denominated bonds are governed by the laws of England and Wales and asked the court to clarify that prior injunctions restricting payment on Argentina's restructured debt do not apply to foreign banks processing such bonds.

Argentina missed a June 30 deadline for making a regularly scheduled distribution to exchange bondholders.   It has a 30-day grace period to avoid going into formal default for the second time in 13 years.

On July 7, 2014, a team of negotiators from Argentina met with court-appointed mediator Daniel Pollack to discuss the nation's standoff with holdout bondholders and establish the groundwork for future meetings.

On the same day, Argentina's Ministry of Economy and Public Finance issued a statement claiming that Judge Griesa did not have the authority to block the payment of more than $538 million to exchange bondholders, and that BNY Mellon would be violating its obligations as trustee if it returned the money.  According to Argentina, Judge Griesa exceeded his jurisdiction because the relevant bonds were issued under U.K. law and denominated in euros, and the holders have an absolute and unconditional right to the payments deposited with BNY Mellon.

In a separate ruling handed down on June 16, 2014, the U.S. Supreme Court, by a margin of seven to one (with one Justice abstaining), affirmed a decision of the U.S. Court of Appeals for the Second Circuit (EM Ltd. v. Republic of Argentina, 695 F.3d 201 (2d Cir. 2012)), directing two banks, in connection with Argentina's long-running dispute with holdout bondholders, to disclose comprehensive information concerning assets Argentina owns outside the U.S.  Writing for the majority, Justice Scalia concluded that no provision of the Foreign Sovereign Immunities Act of 1976 immunizes a foreign sovereign judgment-debtor from post-judgment discovery of information concerning its extraterritorial assets.  In a dissenting opinion, Justice Ginsburg objected to the "sweeping examination of Argentina's worldwide assets the Court exorbitantly approves today," writing that she "would limit NML's discovery to property used [in the U.S.] or abroad 'in connection with . . . commercial activities.'"

On May 29, 2014, Argentina reached an agreement to repay $9.7 billion in debt over a period of five years to the "Paris Club," an unofficial consortium of finance officials from 19 nations that provides financial services such as debt restructuring, debt relief and debt cancellation to indebted countries and their creditors.  Under the agreement, Argentina will make an initial payment of $650 million in July 2014, a $500 million payment in May 2015, and three annual payments each year thereafter to retire the debt.  The interest rate is set at three percent. The agreement provides that, if the Paris Club's 19 member countries make significant investments in Argentina, the required amount of Argentina's payment installments may increase. However, if those countries make insufficient investments in Argentina during the next five years, the maturity of the Paris Club debt could be extended by two years, with a one percent increase in the interest rate.

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