Sovereign Debt Update

Sovereign Debt Update

On September 26, 2014, the United Nations Human Rights Council passed a resolution (A/HRC/27/L.26) condemning "vulture funds" like Argentina's holdout bondholders "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." 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, which was proposed by Argentina, Brazil, Russia, Venezuela, and Algeria, passed in the 47-member council with 33 votes in favor. Nine member states abstained, and five—the Czech Republic, Great Britain, Germany, Japan, and the U.S.—opposed the text. The U.S. was highly critical of the resolution, with U.S. representative Keith Harper warning the council that 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." Harper emphasized that "[i]f not handled appropriately, [the discussions] risk creating uncertainties which could drive up borrowing costs or even choke off financing for developing countries."

On October 6, 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 Argentina litigation begins to impact other countries. The proposals come on the heels of the August 29, 2014, proposal by the International Capital Market Association ("ICMA") to deter disruptive predatory and holdout behavior. 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 at

Recent Developments in the Dispute Between Argentina and Its Holdout Bondholders

On September 19, 2014, the U.S. Court of Appeals for the Second Circuit dismissed an appeal by Citibank NA ("Citibank") of U.S. district court judge Thomas Griesa's July 28, 2014, order preventing Citibank from processing an upcoming payment on $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 July 28 order was merely a clarification, rather than a modification, of a prior ruling. Citibank had argued that the July 28 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 September 22, 2014, The Bank of New York Mellon Corporation ("BNY Mellon") asked Judge Griesa to prevent a group of creditors from accessing $539 million in Argentine exchange bond payments in BNY Mellon's custody to satisfy money judgments against Argentina, 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 other indenture trustees and exchange bondholders. BNY Mellon has held the funds since Judge Griesa ordered the bank to do so on August 6, 2014, promising the bank that it would suffer no liability as a consequence.

On September 26, 2014, Judge Griesa ruled that Citibank could make a scheduled $5 million payment on approximately $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 his July 28, 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 would 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 September 29, 2014, Judge Griesa found Argentina in contempt of court for defying his previous orders. However, the judge deferred to a later date the determination of the sanctions that would be levied on the South American nation.

On September 30, 2014, Argentina deposited $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 were also paid and holding Argentina in contempt for failing to comply. Argentina made the deposits in accounts at Nación Fideicomisos S.A., which, in defiance of Judge Griesa's directives, Argentina selected to replace BNY Mellon as the trustee for the bonds.

Judge Griesa on October 6, 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 September 11, 2014, of the Sovereign Payment Law, which, among other things, supplanted BNY Mellon with Nación Fideicomisos S.A. 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 October 22, 2014, the U.S. Court of Appeals for the Second Circuit dismissed Argentina's appeal of Judge Griesa's August 6, 2014, order blocking a $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 that "the order neither expands nor modifies the existing injunction."

On October 27, 2014, Judge Griesa denied a request by a group of Argentina's creditors to access $539 million in funds in the custody of BNY Mellon to satisfy money judgments against Argentina. Judge Griesa ruled that the creditors cannot have access to the funds, which were earmarked to make payments to Argentina's exchange bondholders, because the funds are located outside the U.S., in Argentina. He also held that the Foreign Sovereign Immunities Act ("FSIA") does not authorize the attachment or execution of sovereign property outside the U.S. In his ruling, Judge Griesa wrote that "even if plaintiffs show that the Republic has an interest in the funds, which the court does not reach, turnover would not be authorized by the FSIA."

On October 30, 2014, Argentina defaulted on its sovereign debt for the second time since July when it failed to make a coupon payment on $5.4 million in par bonds issued under foreign law, thus increasing the risk of acceleration and economic collapse. Although Argentina had already defaulted in July on its discount notes, holders of the now-defaulted par bonds are more likely to accelerate their debt because it is trading at a steeper discount to original value. If the debt is accelerated, Argentina could be obligated to pay investors $30 billion immediately—$2 billion more than the South American nation holds in its national reserves. In the aftermath of the default, Fitch Ratings downgraded Argentina's par bonds from C to D. Shortly after the default was announced, Argentine Cabinet chief Jorge Capitanich told reporters that, in lieu of accelerating, bondholders should take legal action against Judge Griesa, who blocked debt payments when he ruled in favor of holdout bondholders.

On November 4, 2014, Argentina appealed to the U.S. Court of Appeals for the Second Circuit Judge Griesa's October 3, 2014, order finding the South American nation in contempt of court for taking steps to evade his prior orders preventing Argentina from making payments on restructured debt without also paying holdout bondholders. Argentina filed a notice of appeal of the contempt ruling, in which Judge Griesa held that Argentina's moves to strip BNY Mellon as the trustee for the bonds and Argentina's plans to pay exchange bondholders locally without any recognition of the country's obligation to its holdout bondholders are unlawful and must not be carried out.

On November 6, 2014, the English High Court of Justice, Chancery Division, made two rulings in litigation commenced by a group of investors holding euro-denominated bonds (the "Euroholders") issued by Argentina pursuant to its 2005 and 2010 exchange offers. In Euroholders Knighthead Master Fund LP v. The Bank of New York Mellon (2014), Claim No. HC-2014-00070, Mr. Justice Newey adjourned until mid-December the Euroholders' application for declarations with respect to their interest in funds held by BNY Mellon and with regard to the alleged irrelevance of the injunction issued by U.S. district court judge Griesa to BNY Mellon's payment obligations, pending notice to the holdout bondholders involved in the U.S. litigation and to give the holdout bondholders an opportunity to intervene in the U.K. action. In addition, Mr. Justice Newey declined the Euroholders' application for an injunction restraining BNY Mellon from disbursing the funds to parties other than the Euroholders.