Argentina Stands Pat, Repeats Exchange Offer

April 10, 2013

On October 26, 2012, the Second Circuit Court of Appeals affirmed judgments of Judge Griesa of the District Court for the Southern District of New York in NML Capital, Ltd. v. Republic of Argentina, stating, “We hold that Argentina breached its promise [of equal (pari passu) treatment of the plaintiffs’ debt] and, accordingly, affirm the underlying judgments of the district court. Further, we find no abuse of discretion in the injunctive relief fashioned by the district court.” The injunction issued by Judge Griesa requires “ratable payments” to be made to NML and the other plaintiffs (the “Holdout Bondholders”) concurrently with or in advance of any payments to holders of bonds issued pursuant to Argentina’s 2005 and 2010 exchange offers (the “Exchange Bondholders”). The Second Circuit did, however, remand the case to Judge Griesa “to address the operation of the payment formula and the injunctions’ application to third parties and intermediary banks.” On February 27, Second Circuit held a hearing on Judge Griesa’s response to those two inquiries. 

On March 1, the Second Circuit, in response to Argentina’s apparent suggestion at the February 27 hearing that it had formulated an alternative payment formula, ordered Argentina to submit its own proposal on March 29. The proposal was to indicate “(1) how and when it proposes to make current those debt obligations on the original bonds that have gone unpaid over the last 11 years; (2) the rate at which it proposes to repay debt obligations on the original bonds going forward; and (3) what assurances, if any, it can provide that the official government action necessary to implement its proposal will be taken, and the timetable for such action.” As widely predicted, Argentina proposed to treat the Holdout Bondholders “equally” by offering them essentially the same terms offered to the 2010 Exchange Bondholders. A few noteworthy aspects of the proposal are (1) in response to the requirement to “make current” the original bonds, it purports to provide for immediate payment of the past due interest, but (a) interest accrued before December 31, 2001, is capitalized and added to the Holdout Bondholders’ claims, (b) no interest is paid for 2002 or 2003, (c) interest thereafter is calculated based upon the contract rate of the Exchange Bonds (not the Holdout Bond contract rates which are higher) and a reduced principal amount based on the haircuts imposed in the 2010 exchange offer (as opposed to the actual principal amount owed on the Holdout Bonds), and (d) for most Holdout Bondholders past due interest comes in the form of additional notes that also bear interest at a lower rate than the Holdout Bonds; (2) like the prior exchanges, it includes GDP warrants, but only from today forward, arguing that offering retroactive GDP warrants would be inconsistent with their purpose of requiring payments concurrent with above-expectation GDP performance; (3) while it offers only a discount option (reduction of principal) to most Holdout Bondholders, there is a limited (capped) par option (no principal forgiveness, but below market interest rate) for some smaller holders; and (4) while the proposal purports to be the same as the 2010 exchange offer, the discount is not disclosed and some analysts believe that the net present value would be considerably less than the 2010 exchange.

In support of its proposal, Argentina points to language in the Court’s October 26 order indicating that the injunction ordering ratable payment is an “equitable remedy” for Argentina’s breach of the pari passu clause. As such, Argentina argues, the Court must consider its fairness. Argentina insists that its proposal is more fair and equitable in that (1) it provides for immediate payment in cash or liquid securities of all past due interest; (2) it is consistent with Argentina’s ability to pay, which it claims was never properly considered by the District Court; (3) it satisfies the pari passu clause by treating Holdout Bondholders “commensurately” with the Exchange Bondholders in respect of the original indebtedness; and (4) it avoids inequitably affording the Holdout Bondholders “vastly better treatment” than the Exchange Bondholders and an excessive rate of return, calculated based on the assumed purchase price of their bonds.

Possible Outcomes

The Court has now invited the Holdout Bondholders to submit a response to Argentina’s proposal by April 22. Predicting the outcome is highly speculative given the Court’s broad discretion and uncertainty as to how expansively it views its role. Although there are myriad variations, the Court’s principal options are:

  • Adopt Argentina's proposal verbatim. Argentina’s proposal mirrors its 2010 exchange offer, which was previously rejected, appropriately according to the Court’s prior opinion. We think it highly unlikely that the Court will adopt this proposal, and especially so now that it has asked for a response from the other side.
  • Affirm Judge Griesa’s payment-in-full formula. This outcome is certainly possible, but ordering Argentina to submit its predictable proposal may indicate that the Court is reluctant to order immediate payment-in-full of the holdouts bondholders. We expect the Holdout Bondholders to endorse this formula, perhaps with some proposed changes.
  • Adopt an alternative “ratable payment” formula. If the Court rejects both proposals, it might craft its own payment formula requiring less than immediate payment-in-full. This would be unusual for an appellate court, but we think it cannot be ruled out.
  • Reject both proposals, and remand the case to the District Court.  If the Court rejects both proposals, the more likely result may be that it will remand the case to the district court with instructions to hear evidence on the fairness arguments raised by Argentina, and any arguments set forth by the Holdout Bondholders, and to decide on a formula accordingly.

It should be noted that Argentina’s proposal seeks to condition the Holdout Bondholders remedy on its “voluntary” agreement to restructure and partially reduce their debt by means of a bond exchange. Even if the Court ultimately rejects the District Court’s immediate payment-in-full formula, we would not expect any remedy that is adopted to be subject to similar conditions. Thus, the Holdout Bondholders may well be free to pursue a full recovery though separate proceedings under the fiscal agency agreement.

Argentina's Plan B

Finally, the widespread expectation that Argentina’s proposal will not be accepted by the Court has led to renewed speculation regarding a “Plan B” by which Argentina could circumvent the injunction, especially in the wake of its public insistence that it will continue to pay the Exchange Bonds regardless of the outcome. There are many hypothetical variations, but most scenarios contemplate an exchange and/or amendment of the current Exchange Bond indenture to fashion a payment mechanism that would not require the participation of parties bound by the injunction (such as payment within Argentina and subject to Argentine law and jurisdiction). Doing so in time to avoid a default would be no easy matter and is made more difficult by the March 5, 2012, order of the District Court (which has not been stayed) that “the Republic shall not during the pendency of the appeal to the Second Circuit take any action to evade the directives of the February 23, 2012 Orders [ruling against Argentina and issuing the injunction] in the event they are affirmed, render them ineffective in the event they are affirmed, or diminish the Court's ability to supervise compliance with the February 23, 2012 Orders in the event they are affirmed, including without limitation, altering or amending the processes or specific transfer mechanisms by which it makes payments on the Exchange Bonds, without prior approval of the Court.” While we do not dismiss this possibility, we believe the mechanical and legal hurdles to achieving it are considerable.

This article was originally published by Bingham McCutchen LLP.