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Pari Passu Wishful Thinking (Settlement Thought for the Day)

posted by Anna Gelpern

With little to add to Mark's wonderful analysis of the Second Circuit decision in NML v. Argentina and the ensuing crazy, my thoughts drift to settlement. Until recently, my entire view of this case had been premised on the two sides locked in a mortal battle, driven by factors far beyond the law and economics of the transactions at hand. I had assumed that for Argentina, it was primarily about anti-vulture politics, publicly defined as not paying NML more than the rest--while for NML, it was primarily about finding a superior enforcement path, defined as getting paid demonstrably more than the rest. By definition, neither can live while the other survives.

Contemplating recent events while cut off from civilization, something felt different.

NML got really fabulous law out of the Second Circuit decision. I do not see how it can get any better than this: ranking means ratable payment, selective nonpayment plus somethingorother means breach, breach means injunction, and injunction means third parties around the world are on the hook unless and until they are let off in a court proceeding. Even assuming this holds up entirely before the Supreme Court, there is no upside and some downside to going forward and dragging this out, potentially well into 2015.

Paradoxically, if NML is in this for the money and not for the law, the Second Circuit decision changes little. Argentina is not paying, has just gained a ton of time, and is bending over backwards to show that it would rather self-destruct than pay NML. I would not want to speculate about the math in this case, but find it hard to see how this can be a huge score for the plaintiffs as time wears on. Meanwhile, waiting gives the policy establishment and the market time to adapt to make similar lawsuits harder. And as the Second Circuit opinion suggests, case law involving other countries and other clauses could narrow its holding.

If this is so, then I might just think about pocketing the fabulous law, and using the window of opportunity to sue a government that has not spent a decade painting itself into a political corner. This means settling with Argentina for some face-saving amount far below the hoped-for score. With more than a decade of past-due interest and GDP warrants to play with, I suspect that there is a substantial accounting twilight zone that would allow everyone to claim victory and move on.

Apart from the overarching objection that this is nuts, there are two others. First, there are the Lock Law and the Rights Upon Future Offers clause in the new bonds, both of which seem to bar anything that smells like a better deal for the holdouts. As to the Lock Law, Argentina has said and shown many times that it can be suspended if need be. As to the RUFO clause, I have always thought it was a political red herring in this case. Rodrigo Olivares-Caminal has pointed out that it was drafted specifically to exclude settlement (hence prompting the Lock Law); moreover, any viable settlement today would fall into a gray zone that would make litigation an iffy proposition for the new bondholders. For this reason, all the chatter about RUFO expiration magic dates strikes me as somewhat beside the point.

The second objection gives me more of a pause. It may well be that the battle with holdouts is an invaluable political asset for the government, and settling at any price--even one that is plausibly within its equal treatment parameters--is undesirable at this time. If so, then all bets are off and we are in for the long haul.


Your second objection is the one that matters. Argentina is stonewalling because the government can make great domestic hay that way. I see nothing on the horizon to make it change its tactics. Argentina has gone down the tubes so many times, I don't see how the present mess can create much domestic angst.

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