NML Pulls no Punches in its Response to Argentina’s Ratable Payment Proposal

April 23, 2013

On April 19, NML filed its response to Argentina’s March 29 letter proposing an alternative to the ratable payment scheme ordered by the Southern District of New York. Using unusually strong language, NML argues that Argentina “continues its long and consistent pattern of defaulting on its contractual obligations, defying the laws of the United States (which its contracts expressly invoked), and showing contempt for the courts to whose jurisdiction it unreservedly submitted.”

By way of review, on October 26, 2012, the Second Circuit affirmed judgments of Judge Griesa of the Southern District that Argentina breached its promise to grant equal treatment to debt held by NML and the other plaintiffs (the “Holdout Bondholders”) and ordered Argentina to make “ratable payments” to 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”). After a February 27 hearing “to address the operation of the payment formula and the injunctions’ application to third parties and intermediary banks”, the Court ordered Argentina to submit a proposal detailing “(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.” A memorandum describing and analyzing Argentina’s March 29 proposal can be found here.

In its response, NML argues that Argentina’s proposal (1) contravenes the Second Circuit’s October 26 decision in favor of NML and its March 1 order that Argentina submit its own ratable payment proposal, and (2) fails to demonstrate that the District Court abused its discretion.

Citing the Second Circuit’s order that Argentina’s proposal must make current and repay the “original bonds”, NML argues that “Argentina proposes to never pay its obligations on Appellees’ [Holdout] Bonds and, instead, to replace those Bonds with an assortment of new bonds modeled on—but actually substantially worse than—the [Exchange Bonds]”. In support of that claim, NML notes that:

  • Even Argentina's valuation of its proposal, which relies upon “generous assumptions” as to the market value of the bonds, is only $201 million, approximately 15% of the $1.47 billion due under the terms of the Holdout Bonds. Others have valued it closer to 6% of the amounts due under the Holdout Bonds.
  • The numerous anomalies in Argentina’s proposal for payment of past due interest (described more fully in our prior alert) mean that “Argentina thus proposes to pay Appellees only a small percentage of the past due interest it owes, and then only in the form of Argentine IOUs, not in cash.”
  • The proposal contains no meaningful assurances of implementation, as to which there is even greater doubt in light of reports since the February 27 hearing that “Argentina is actively devising a scheme to move the payments on the Exchange Bonds outside of the United States” to evade the injunction if upheld.

NML then argues that the injunction ordered by the District Court was not an abuse of discretion, responding to each of the fairness arguments advanced by Argentina, as follows:

  • Argentina purports to treat all “bondholders” equally. The equal payment provisions of the Holdout Bonds and the October 26 decision require Argentina to treat all “payment obligations,” not all bondholders, equally. That requires paying all amounts due to each bondholder ratably, not paying each bondholder the same amount. Moreover, the new bonds contemplated by Argentina’s proposal would be a separate series from the existing Exchange Bonds, assuring, according to a former Argentine Finance Secretary, “very low liquidity [as] a way to punish the holdouts because there will be no markets for trading.”
  • Argentina’s proposal does not treat the Holdout Bondholders and Exchange Bondholders equally. The proposal is worth 34% less that the 2005 Exchange Bonds and 24% less than the 2010 Exchange Bonds, mostly due to past GDP Unit payments to Exchange Bondholders, which the Holdouts are denied, and past cash interest payment on the Exchange Bonds that are replaced with Global 17 bonds in the new proposal.
  • Argentina’s assertion that $43 billion of its debt could become immediately payable if the injunction were upheld is “bogus.” The clause cited as triggering acceleration of the Exchange Bonds can be invoked only if Argentina “voluntarily makes an offer to purchase or exchange.” Complying with an injunction is not a voluntary offer. Further the risk of follow-on litigation that may render Argentina unable to pay is purely speculative. Moreover, the court in any such proceeding would be required to determine Argentina’s capacity to pay, just as the District Court did in this case.
  • Sovereign debt restructuring will not be affected by these proceedings. The Court’s previous rulings to that effect are supported by Moody’s recent report that of 34 sovereign bond exchanges, only Argentina’s resulted in “persistent litigation” and the International Institute of Finance’s conclusion that Argentina’s predicament is due to “its own behavior, evidenced by more than a decade of unilateral treatment of its creditors.”
  • Argentina’s allegation of “exorbitant” returns to certain Holdout bondholders is wholly unsupported and based on many questionable assumptions. Moreover, it fails to account for the substantial enforcement costs incurred and flies in the face of the Court’s acknowledgement of the importance of enforcing rights of creditors acquiring debt in the secondary market.

Our conviction that there is little possibility that the Court will adopt Argentina’s proposal remains strong. We remain doubtful that the Second Circuit will take the unusual step of crafting its own ratable payment scheme. Thus we expect the Court either to affirm Judge Griesa’s formula or, if it is reluctant to do so, to remand the case to the district court with instructions to craft an alternative formula.

While we are reluctant to predict the Court’s ruling as to the application of the injunction to Bank of New York and intermediate banks, we remain convinced, despite recent statements by Argentina, that mechanical and legal hurdles to achieving a “Plan B” to circumvent the injunction if upheld, are considerable.


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This article was originally published by Bingham McCutchen LLP.