Argentina—The long-running dispute over the payment of Argentina's sovereign debt has been particularly active in recent weeks and months.
Events Leading Up to Argentina's Default
On June 30, 2014, Latin America's third-largest
economy failed to make a scheduled $539 million payment to
bondholders after U.S. District Court judge Thomas Griesa ruled
that the payment could not be made unless holdout bondholders from
restructurings in 2005 and 2010 were also paid. Under the governing
documents, Argentina—which has about $200 billion in
foreign-currency debt, including $30 billion of restructured
("exchange") bonds—had a 30-day grace period after
the June 30 default to make the payment.
On July 28, 2014, Judge Griesa authorized Argentina to make a
one-time payment on Argentine law-governed exchange bonds because
those securities cannot be distinguished from Argentine bonds
issued to Spanish oil company Repsol SA earlier in 2014 in
compensation for the expropriation of its local subsidiary. The
Repsol settlement bonds are not part of the long-running dispute
between Argentina and the holdout bondholders. "The court
cannot enjoin payment on the dollar-denominated exchange bonds
without also upsetting the Repsol settlement," Judge Griesa
wrote in his ruling. However, the judge directed the parties to
find a way to distinguish between the Repsol and exchange bonds
before the next interest payment.
On July 29, 2014, holders of Argentina's euro-denominated
exchange bonds urged Judge Griesa to issue a last-minute stay of
his June 30 debt ruling, which risked toppling the South American
country into default. According to the exchange bondholders,
"A default would undo much of the work this Court has
accomplished over the last ten years and extend litigation here and
around the world for years on end." The bondholders also
disclosed that they had been in touch with other bondholders who,
like them, would be willing to waive the "rights upon future
offers" (RUFO) clause that prevents Argentina from settling
with holdout investors on terms better than those accepted by the
exchange bondholders.
On July 30, 2014, Argentina defaulted on its sovereign debt for
the second time in approximately 13 years when the 30-day grace
period expired following the payment default that occurred on June
30. Earlier that day, Standard & Poor's Ratings Services
downgraded Argentina's foreign-currency credit rating to
"selective default," meaning that the country is meeting
its obligations on some bonds but not others, as the clock ran out
on efforts to craft a last-minute deal to avert the country's
second default.
Ramifications and Aftermath
On July 31, 2014, Argentina's government, asserting that the
collapse of negotiations with the holdout bondholders was due to
the "malpractice" of the U.S. judiciary, denied that it
had defaulted on its sovereign debt. At a news conference in Buenos
Aires, Jorge Capitanich, Argentina's Chief of the Cabinet of
Ministers, blasted the U.S. courts for a lack of impartiality and
criticized the performance of court-appointed mediator Daniel A.
Pollack for failing to facilitate reasonable deal conditions that
could be agreed to by both Argentina, as a sovereign nation with
legal and constitutional restrictions, and hedge funds holding
bonds worth $1.5 billion.
On August 1, 2014, the International Swaps and Derivatives
Association, Inc. ("ISDA") announced that its Americas
Credit Derivatives Determinations Committee (the
"Determinations Committee") resolved that a failure to
pay credit event had occurred with respect to Argentina. This means
that sellers of credit default swaps ("CDSs") with a net
exposure of around $1 billion must now pay out to investors who
hedged against Argentina's sovereign debt default. ISDA
announced on August 14, 2014, that it would organize an auction on
August 21 to settle CDSs that reference nearly $1 billion in
Argentine debt. However, on August 19, the 15-member Determinations
Committee voted unanimously to postpone the auction until some time
in September 2014. According to the Determinations Committee, the
auction will cover only CDSs related to 11 Argentine debt issues
with maturities in 2017, 2033, and 2038. Further information
regarding the auction is posted on ISDA's website, http://www.isda.org/credit.
On August 1, 2014, Argentina informed Judge Griesa that the nation
had lost faith in the mediator appointed to resolve the dispute,
claiming that the mediator's pre-default statement that
Argentina was in "imminent default" was "harmful and
prejudicial" and asking that he be replaced. Judge Griesa
rejected the request and said talks would have to continue. The
judge also upbraided Argentina at the hearing, saying that the
country's obligations to pay holdout bondholders must be
resolved. According to the judge, Argentina's pronouncements
ignoring the facts amount to "half-truths" that are
"false and misleading" and "do not comply with the
law, which requires disclosure of facts."
On August 6, 2014, Judge Griesa issued an order barring Argentina
from making payments on euro-denominated exchange bonds as part of
a larger decision that forbade Argentina from paying holders of
dollar-denominated debt. Certain holders of euro-denominated bonds,
claiming that their debt is not covered by U.S. law and that Judge
Griesa exceeded his authority in blocking their payments, appealed
the order to the U.S. Court of Appeals for the Second Circuit on
August 19.
On August 7, 2014, Argentina asked the International Court of
Justice ("ICJ") in The Hague to hear a lawsuit it wants
to commence against the U.S., claiming that decisions by U.S.
courts in the dispute over payment of its restructured and
nonrestructured debt have violated its sovereignty. However, in
order for a lawsuit to move forward, the U.S. would have to consent
to the ICJ's jurisdiction, and since the tribunal began
operating in 1946, permission has been granted by the U.S. in only
22 cases. The U.S. is unlikely to grant the request in the absence
of any bilateral treaty that would require the U.S. to accept the
ICJ as a venue to resolve disputes with Argentina.
At a hastily convened hearing on August 8, 2014, Judge Griesa
again chastised Argentina for publicly denying that it had
defaulted on its debt, threatening a contempt order if more
"false and misleading" pronouncements follow.
On August 11, 2014, a U.S. magistrate judge granted the request of
holdout bondholder NML Capital Ltd. ("NML") to obtain
information from numerous companies that the hedge fund claims are
hiding $65 million embezzled from Argentina's coffers, ruling
against 123 Nevada entities the judge described as shell companies.
The judge directed the companies to provide information concerning
their finances, or to provide a deponent, so that NML can attempt
to locate funds which were allegedly embezzled by the current
Argentine President, Cristina Fernández de Kirchner; her
late husband; and associate Lázaro Báez.
On August 19, 2014, President Fernández de Kirchner
announced in a nationwide address that, in an effort to sidestep
the U.S. court ruling which blocked payments on restructured debt
and caused the nation to default for the second time in 13 years,
the government will submit a bill to the Argentine Congress that
lets overseas debt holders swap into new bonds governed by
Argentine law with the same terms. Payments will be made into
accounts at the central bank instead of through Bank of New York
Mellon Corp. ("BNY Mellon"), the current trustee.
At a hearing held on August 21, Judge Griesa sharply criticized
the proposal, stating that it violates prior court orders and is
therefore illegal. He also said he was "absolutely
appalled" that Argentina had not notified its lawyers about
the proposal before it was made public. However, the judge denied
an emergency request by holdout bondholders to hold Argentina in
contempt, emphasizing that imposing such a sanction would not push
the parties any closer to a settlement.
Argentina's government on August 22, 2014, accused Judge
Griesa of making imperialist comments against the nation. At a
press conference in Buenos Aires, Argentine Cabinet Chief
Capitanich stated that the judge's unfortunate and even
imperialist statements constitute an undue interference with
Argentina's sovereignty.
On August 26, 2014, Argentina's exchange bondholders sued BNY
Mellon in London Chancery Court, seeking to gain access to interest
payments owed to them. Later the same day, Argentina revoked BNY
Mellon's permission to operate a local representative office in
Argentina after the bank refused to make interest payments owed to
participating bondholders in July due to Judge Griesa's order
prohibiting the payments.
On August 29, 2014, the International Capital Market Association
("ICMA"), a group of banks and investors, announced a
proposal designed to reduce the ability of holdout bondholders to
undermine sovereign debt restructurings. The plan was created after
meetings convened by the U.S. Treasury Department in the aftermath
of Greece's debt restructuring and comes on the heels of the
second Argentine debt default. Under ICMA's proposal,
"pari passu," or equal treatment, clauses would
be interpreted to bind all bondholders to the terms of any debt
restructuring agreement approved by at least 75 percent of the
bondholders. The International Monetary Fund was set to propose
similar guidelines in late September.
ISDA on September 3, 2014, announced the completion of an auction
to settle CDSs referencing Argentine debt. The auction established
a final price of 39.5 cents on the dollar for the Argentine debt,
meaning CDS sellers will have to pay 60.5 percent on approximately
$1 billion in wagers made by investors who hedged against
Argentina's sovereign debt default.
On September 4, 2014, in an effort to end-run Judge Griesa's
orders prohibiting Argentina from making interest payments on
exchange bonds without also paying amounts owed to holdout
bondholders, Argentina's Senate passed a bill authorizing its
government to bypass U.S. courts and pay its bondholders through
local channels. The proposal was approved by Argentina's lower
legislative body, the Chamber of Deputies, on September 11, 2014.
The legislation also authorizes the removal of BNY Mellon as the
trustee under the bond indentures, with bond payments being made
instead through state-backed Banco de la Nación
Argentina.
On September 9, 2014, the United Nations General Assembly passed
a resolution to begin an "intergovernmental
negotiation process aimed at increasing the efficiency, stability
and predictability of the international financial system."
That process would include negotiations toward the implementation
of a global bankruptcy process for sovereign debtors. The
resolution passed by a super-majority vote of 124-11 with 41
abstentions. The U.S. voted no, along with 10 other countries. Such
a bankruptcy process could make it more difficult for holdout
bondholders to prevent countries from successfully restructuring
their debts and could limit future defaults.
Puerto Rico—Although Puerto Rico is an unincorporated territory of the United States rather than a sovereign, the financial troubles of the beleaguered Caribbean commonwealth have received a great deal of attention lately.
On June 28, 2014, Puerto Rican governor Alejandro García
Padilla gave his imprimatur to legislation that creates a judicial
debt relief process for certain public corporations, including the
Puerto Rico Electric Power Authority (PREPA), the Puerto Rico
Aqueduct and Sewer Authority (PRASA), and the Puerto Rico Highways
and Transportation Authority (PRHTA). The new law is modeled on
chapters 9 and 11 of the U.S. Bankruptcy Code (with certain
important distinctions) and is in all practical respects a
non-federal bankruptcy law.
Under the Puerto Rico Public Corporation Debt Enforcement and
Recovery Act, an eligible public corporation may pursue two
alternatives, simultaneously or in sequence. The first is a
"consensual debt relief transaction" akin to a
prepackaged or prenegotiated chapter 11 case.
To commence such a proceeding, an eligible entity must file a
notice of a "suspension period," which stays collection
actions by all identified creditors for up to 360 days, unless the
entity elects not to seek court approval for specified debt relief.
If such approval is requested, the stay remains in place until
either: (i) any court order approving debt relief becomes final; or
(ii) 60 days after denial of such relief.
Debt relief may be approved by the court only if: (a) creditors
holding at least 50 percent of the amount of debt within a class of
substantially similar obligations participate in a vote or a
consent solicitation for a proposed amendment, modification,
waiver, or debt exchange; and (b) the proposed relief is approved
by creditors in the class holding at least 75 percent of the amount
of the debt represented. Upon approval by a class of creditors, the
applicable debt relief would be binding on all creditors within the
applicable class.
The second avenue for debt relief involves the filing of a
petition with the court by or on behalf of an eligible public
corporation, which triggers an automatic stay banning creditor
collection efforts. This avenue, similar to the rules for chapter
11 plans, provides that the court may approve a debt adjustment
plan if at least one class of impaired debt votes to accept the
plan. A class is deemed to approve a plan if: (i) creditors in the
class holding at least two-thirds of the amount of the debt
involved vote on the plan; and (ii) of the class members who
actually vote, the holders of more than one-half of the debt in the
class approve the plan.
All impaired creditors must receive at least as much under a debt
adjustment plan as they would have received if all creditors had
been allowed to enforce their claims on the filing date of the
petition. Also, each impaired creditor must receive its pro rata
share of 50 percent of the debtor's positive free cash flow, if
any, after payment of certain specified expenses, during the 10
fiscal years following the first anniversary of the plan's
effective date, until creditors are paid in full.
The new law's obvious similarities to chapter 9 and chapter 11
or the Bankruptcy Code, as well as the fact that the legislation
was not enacted in accordance with Article I, Section 8, of the
U.S. Constitution, immediately provoked attacks on its
constitutionality. Bond funds (collectively, the "Bond
Funds") affiliated with Franklin Resources Inc. and
Oppenheimer Rochester Funds, which collectively hold approximately
$1.7 billion in Puerto Rico debt, filed a lawsuit on June 30, 2014,
alleging that the legislation is unconstitutional, even though no
debtor has actually attempted to restructure its debt under the
law. The Bond Funds filed a summary judgment motion in early
August, arguing that the undisputed facts require the court to
declare the law void, regardless of the specific circumstances
under which it might be applied. The court directed Puerto Rico to
submit by September 12 pleadings supporting its claim that the law
is constitutional.
Due to its status as an unincorporated territory of the U.S.,
Puerto Rico is barred from seeking either protection under the
Bankruptcy Code or international financial assistance. Puerto Rico
has claimed that section 903 of the Bankruptcy Code, which arguably
preempts any attempt by Puerto Rico to enact its own debt relief
law, does not apply to the commonwealth because it is barred from
filing for chapter 9 protection or, in the alternative, that the
section is unconstitutional because it unfairly discriminates
against the island territory.
On August 15, 2014, PREPA announced that it had reached an
agreement with creditors to delay repayment of bank loans until
March 2015. It remains to be seen whether the court will be
inclined to issue what would amount to an advisory opinion on the
Bond Funds' claims that the new debt relief law is
unconstitutional.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.