EuroResource—Deals and Debt | Special Sovereign Debt Edition

EuroResource—Deals and Debt | Special Sovereign Debt Edition

For the benefit of our clients and friends investing in European distressed opportunities, our European Network is sharing some current global developments.

Global—On 29 August 2014, the International Capital Market Association ("ICMA"), a group of banks and investors, announced a proposal designed to reduce the ability of holdout investors to undermine sovereign debt restructurings. The plan was created after meetings convened by the US Treasury Department in the aftermath of Greece's debt restructuring and comes on the heels of Argentina's second default on its sovereign debt in 13 years. 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 bondholders.

On 9 September 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 supermajority vote of 124–11 with 41 abstentions. The US 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.

On 26 September 2014, the United Nations Human Rights Council passed a resolution (A/HRC/27/L.26) condemning so-called "vulture funds" like Argentina's holdout bondholders. Among other things, the resolution expresses concern regarding "the voluntary nature of international debt relief schemes which has created opportunities for vulture funds to acquire defaulted sovereign debt at vastly reduced prices and then seek repayment of the full value of the debt through litigation, seizure of assets or political pressure". It also notes that "vulture funds, through litigation and other means, oblige indebted countries to divert financial resources saved from debt cancellation and diminish the impact of, or dilute the potential gains from, debt relief for these countries, thereby undermining the capacity of Governments to guarantee the full enjoyment of human rights of its population". The resolution condemns the activities of vulture funds "for the direct negative effect that the debt repayment to those funds, under predatory conditions, has on the capacity of Governments to fulfill their human rights obligations, particularly economic, social and cultural rights and the right to development". The resolution, which was tabled by Argentina, Brazil, Russia, Venezuela and Algeria, passed in the 47-member council with 33 votes in favour. Nine member states abstained and five—the Czech Republic, Britain, Germany, Japan and the US—opposed the text. The US was highly critical of the resolution, with US representative Keith Harper warning the council it could lead states "to use debt distress as an excuse for human rights violations". He also stated that "[t]he state's responsibility for promoting and protecting human rights and fundamental freedoms is not contingent on its sovereign debt situation". "If not handled appropriately", he emphasized, "[the discussions] risk creating uncertainties which could drive up borrowing costs or even choke off financing for developing countries".

On 6 October 2014, the International Monetary Fund ("IMF") released a series of new proposals entitled "Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring". The proposals include reforms to sovereign debt agreements, including strengthened collective action clauses and modification of pari passu clauses akin to the provision relied on by holdout bondholders in Argentina's long-running sovereign debt dispute. Such reforms would not apply to existing sovereign bonds. The IMF proposals state that there may be a need for action on those bonds as well if the precedent set in the Argentine litigation begins to affect other countries. The proposals come on the heels of the 29 August 2014 proposal by ICMA to deter disruptive predatory and holdout behaviour. A principal difference between the two proposals is that the IMF paper does not promote establishing creditors' committees to negotiate agreements resolving disputes. The ICMA proposal can be accessed here.

Argentina—The International Swaps and Derivatives Association ("ISDA") on 3 September 2014 announced the completion of an auction to settle credit default swaps ("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 US$1 billion in wagers made by investors who hedged against Argentina's sovereign debt default. ISDA's Americas Credit Derivatives Determinations Committee unanimously determined on 1 August 2014 that Argentina's failure to pay bondholders constituted a "credit event", putting the South American nation in default and triggering CDSs linked to its bonds. The default occurred on 30 July 2014, the deadline for Argentina to make a US$539 million interest payment on its restructured bonds.

On 4 September 2014, in an effort to end run US District Court Judge Thomas Griesa's orders prohibiting Argentina from making interest payments on restructured bonds without also paying amounts owed to holdout bondholders, Argentina's Senate passed a bill authorizing its government to bypass US courts and pay its bondholders through local channels. The proposal was approved by Argentina's lower legislative body, the Chamber of Deputies, on 11 September 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 19 September 2014, the US Court of Appeals for the Second Circuit dismissed an appeal by Citibank NA ("Citibank") of Judge Griesa's 28 July 2014 order preventing it from processing an upcoming payment on US$8.4 billion in Argentine debt. Only a day after the bank's attorneys argued that the lower court's ruling "put a gun to our head", a three-judge panel of the Second Circuit ruled that it lacks jurisdiction over Citibank's appeal because the 28 July order was merely a clarification, rather than a modification, of a prior ruling. Citibank had argued that the 28 July order could subject the bank to criminal prosecution in Argentina if allowed to stand. "However", the Second Circuit wrote in its order, "nothing in this court's order is intended to preclude Citibank from seeking further relief from the district court".

On 22 September 2014, BNY Mellon asked Judge Griesa to prevent a group of creditors from accessing US$539 million in Argentine exchange bond payments in BNY Mellon's custody to satisfy money judgments against the Republic, arguing that the bank should continue to maintain control of the funds. According to BNY Mellon, its rights as indenture trustee for the exchange bonds, as well as Argentina's rights as the issuer, obligate the bank to hold the money for indenture trustees and exchange bondholders. BNY Mellon has held the funds since Judge Griesa ordered the bank to do so on 6 August 2014, promising the bank that it would suffer no liability as a consequence.

On 26 September 2014, Judge Griesa ruled that Citibank could make a scheduled US$5 million payment on approximately US$8.4 billion in bonds governed by Argentine law. However, the judge declined to rule on the central question of whether payment on those bonds is subject to the 28 July 2014 order restricting such payments, concluding that this is a factual issue requiring further briefing on an expedited basis. The issue turns on whether the local peso and dollar-denominated bonds constitute "exchange bonds" covered by Judge Griesa's broadly worded equal payment injunction. If so, the bank's unit in Argentina will be prohibited from distributing future interest payments to investors, which the bank contends will place it at "serious and imminent" risk of criminal sanctions from the Argentine government.

At a hearing held on 29 September 2014, Judge Griesa found Argentina in contempt of court for defying his previous orders. However, the judge deferred to a later day the determination of what sanctions would be levied on the South American nation.

On 30 September 2014, Argentina deposited US$161 million in an Argentine bank to make interest payments to its exchange bondholders, despite Judge Griesa's orders blocking the payments unless holdout bondholders are also paid and holding Argentina in contempt for failing to comply. Argentina made the deposits in accounts at Nación Fideicomisos SA, which, in defiance of Judge Griesa's directives, it selected to replace BNY Mellon as the trustee for the bonds.

On 3 October 2014, Judge Griesa ordered Argentina to stop trying to evade his orders banning payments to exchange bondholders without compensating holdout bondholders. The judge ordered Argentina to come into full compliance with his orders and to cease efforts to skirt them.

Judge Griesa on 6 October 2014 ordered Argentina to reinstate BNY Mellon as indenture trustee for Argentina's exchange bonds and to "reverse the steps taken" as part of the Argentine government's passage on 11 September 2014 of the Sovereign Payment Law, which, among other things, supplanted BNY Mellon with Nación Fideicomisos SA. In his order, Judge Griesa wrote that "[t]he Republic of Argentina will need to reverse entirely the steps which it has taken constituting the contempt, including, but not limited to, re-affirming the role of The Bank of New York Mellon as the indenture trustee and withdrawing any purported authorization of Nación Fideicomisos, S.A. to act as the indenture trustee, and complying completely with the February 23, 2012 injunction".

On 22 October 2014, the US Court of Appeals for the Second Circuit dismissed Argentina's appeal of Judge Griesa's 6 August 2014 order blocking a US$539 million payment to bondholders via BNY Mellon, ruling that it lacks jurisdiction because the order appealed from was a clarification rather than a modification of prior rulings. As issued, the Second Circuit wrote, the injunction "already prohibited BNY from assisting Argentina in evading its terms, and the order's language concerning BNY's liability does not enjoin third parties, such as euro bondholders…, from bringing suit against BNY". Accordingly, the court concluded, "the order neither expands nor modifies the existing injunction".

Rectification. In the 2 September 2014 edition of EuroResource, we reported that in August 2014, Argentina's holdout bondholders sued BNY Mellon in the Chancery Court in London seeking to gain access to interest payments they are owed. The litigation was actually commenced, on 21 August 2014, by bondholders who participated in Argentina's debt restructurings.