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It Depends, Argentina Edition

posted by Anna Gelpern

The phrase "it depends" was invented 130 year ago by a small group of drunk lawyers from London and New York for the sole purpose of annoying first-year law students, nonlawyers, and people from civil law jurisdictions. Like all things annoying, "it depends" is enjoying a surge in popularity as tensions spike in the Argentine debt saga."It depends" is a magically useful phrase because it can cover up ignorance, describe uncertainty, or assign probabilities in a risky situation. If you are camping out in front of the Special Master's office in New York and hear "it depends" in response to a basic question, you might reasonably wonder which one it is. Here is a mini-guide: 

Q1: Will Argentina default?

A: It depends.*

*Of course it depends on whether the arch-enemies reach a deal. It also depends on whether they reach it in time for the Judge to stay his injunction so that the money sitting at Bank of New York Mellon (BNYM) is released into the relevant payment systems and sent on its way to the bondholders.

Q2: When do you know that Argentina is in default?

A: It depends.*

*Argentina may well be in default already, since creditors in Europe and Japan did not get paid at the end of their business day. However ... Argentina's debt contracts say that default happens if creditors do not get their money 30 days after the payment date (June 30 for the Discount Bonds). They do not say anything about the time of day. Therefore, one might argue that Argentina has until 11:59 pm in New York, or at least until 5 pm in New York. Why not London or Brussels, especially for bonds governed by English law and paid in Brussels? Beats me. Why not close of business for the relevant payment systems? Maybe because in theory, Argentina can deliver a check or cash on the barrell at 11:59 pm. Too late for Tokyo in any event.

Q3: What happens to the restructured bonds if Argentina defaults?

A: It depends.*

Once default happens (see Q2) 25% of any series of Argentina's Discount Bonds can vote to demand full principal and unpaid interest for that series. Thereafter, the same percentage can vote to instruct BNYM to sue Argentina, provided they put up the necessary indemnities for BNYM. If Argentina deposits the past-due payment with BNYM, 50% can vote to rescind the acceleration--WAIT. Argentina has deposited the payment with BNYM. Does it mean that Argentina both defaults and cures at the same time? ... and then you have an endless loop of 25% votes to accelerate and 50% to rescind? Mmmmm ... in theory, yes (see Q10). Nobody's perfect.

If any series of the Discount Bonds accelerates, If Argentina fails to pay principal or interest on the Discount Bonds past the expiration of the grace period (see Q2), then holders of other Argentine bonds, like the Par Bonds, can also accelerate. This is called cross-accelerationdefault. If Argentina cures the missed payment on the Discounts within 60 days of default, an acceleration based on this cross-accelerationdefault is automatically rescinded.

But see above: if cure is depositing money with BNYM, then any acceleration based on the cross-default is automatically rescinded. Someone might well ask a court to interpret this one.

The relevant sections are 4.1(iii) and 4.2 here.

Q4: Will anyone accelerate?

A: It depends.*

*If your investment strategy benefits from a broad-based default, and if you have enough friends in the same series to muster 25%, yes. If you wish it would all go away and/or do not have the voting power to accelerate, then no. To know more, you need to know who holds which bonds, and what their game plan might be.

Q5: What happens to the holdout bonds if the Discount Bonds accelerate?

A: It depends.*

*They get a bunch of new frienemies. If everyone decides to play the accelerate-sue-hold-out game, they have lost their clear shot at the bounty.

Q6: What happens to Argentina if there is default? ... acceleration?

A: It depends.*

*Ask a political economist. Since this is the slowest motion train wreck in history, it could not possibly come as a shock. And even though Argentina is not in great economic shape, 2014 is no 2001. If there is a run on the currency or the banking system, it could be ugly. But no one seems to be running for now. 

Q7: Will CDS trigger?

A: It depends.* 

*Nonpayment and acceleration are both credit events under the terms of credit default swap (CDS) contracts on Argentina. Whether a credit event has occurred is determined by a supermajority vote of an ISDA Determinations Committee, comprising different participants in the CDS market. They read the contract and ISDA's standard-form CDS documentation to decide. In the past, they have stuck pretty closely to the words on the page. In this case, they would have to interpret Argentina's indenture and securities to decide when nonpayment occurs (see Q2). Because the contracts say the money is not paid until it gets to the destination, it is unlikely that money at BNYM would be enough to avoid a CDS trigger. Then again, you never know. Acceleration, if it happens, is more straightforward.

In theory, you could have a CDS trigger, followed by a late payment of the Discount Bonds. Under some circumstances, a person holding a Discount Bond and a CDS could get paid on both. This is where the weedy differences between the bonds that trigger the CDS and those that can be delivered in a CDS auction come into play. Too complicated to go into until we have to (see Q2).

As an aside, if CDS trigger, it does not affect the amount Argentina has to pay (these are wagers by third parties). However, if you hold some combination of bonds and CDS, your incentives to negotiate the bonds are obviously affected by what happens to the CDS.

Q8: Is RUFO Real?

A: It depends.*

*It does not matter. If it is real to the Argentine decision-makers, it is real to you.

Q9: Will there be a deal?

A: It depends.*

*If a cloud of white smoke rises over Manhattan, then yes. But then it still depends. Any deal reached today is most likely to be a deal to buy time for money. The Judge orders Argentina (or, as rumor has it, a group of patriotic banks) to put money in escrow, and in exchange, the plaintiffs ask for a stay, which would allow payment on the Discount Bonds. Presumably a three-week stay is cheaper than a stay through the end of the year, to get past RUFO. A stay that lasts through September 30, when the next payment on the exchange bonds is due, seems most sensible.

On the other hand, I suspect that the Judge would not grant a stay unless he thinks it would be used to negotiate a substantive deal, not another delay. A substantive deal in turn would have to be good enough to bring along all the holdouts from 2005 and 2010 exchanges, not just the plaintiffs in this case. 

Q10: When will this end?

A: It depends.*



" What happens to Argentina if there is default? ... acceleration?"

Indeed it depends. Pressure on Argentina was based on the Assumption that Argentina cares about avoiding default. After default, Argentina has debtor's leverage.

Per the markets, Argentine bonds are worth more after a default than before. It may be because of the benefits of possible acceleration -- Argentine 25 year debt has a very low coupon and a high enough yield to sell in the 20 range. A 10% probability of acceleration would be a healthy profit. But markets have their own internal logic and it is impossible to know why.

Was Argentina really locked out of capital markets? Was there really a reason why they couldn't have sold new bonds at the price their old bonds were trading at?

Does Argentina have any use for the US Federal Court System or ISDA and it credit determination committee -- which is packed with voting members who are far from disinterested. Or S&P which has already lowered their rating based on what they called 'selective default'. I don't know, but by definition, global financial markets are not all sitting in New York. Cayman's anyone? It's a big world.

Argentina's big problem is energy imports. They need capital and expertise which does not need to come from any integrated oil giant that needs to listen to the US. Like Gazprom, for example. And Argentina had Presidential visits from China and Russia in the last month that involved trade deals, with the intention of more to come.

Finally ... it is ARGENTINA. The archetype of the Argentine Paradox . They may not even know, much less care about their rational interests.

So, yea. It depends.

If I have an Argentine bank account can I ask Argentina to deposit my money there?

Fantastic post! However, one question -- doesn't the indenture also specify in section 4.2 that "(B) all other Events of Default have been remedied" as a condition for rescinding the acceleration? And if not receiving the payment is an Event of Default then doesn't that mean that bondholders cannot vote to rescind acceleration as long as the injunction is in place (even if money is at BONY)?

FS: You are exactly right, but ... There is a broader problem with this indenture, which explains how Argentina can say there is no default, while S&P, ISDA DC, and others can say default is a no-brainer. Some terms in the contract are written as if Argentina's payment obligation is met when the money gets to the Trustee. The first half of the cure term, and the obligation to deposit money with the Trustee by 1 pm the day before payment date are examples. But then there is the clause in the bonds and GDP warrants that says exactly the opposite: payment obligation is not met until the holders get the money. Adam has a theory (http://www.creditslips.org/creditslips/2014/06/can-argentina-not-pay-yet-not-default-perhaps-and-maybe-theres-still-a-route-to-ny-state-court.html) that it only refers to check-mailing, but I do not think it works, especially if you look at the comparable language in the GDP warrants, which has nothing to do with mailboxes.

I suspect a court convinced that there has been a payment default would not be swayed by the fact that the money is with the Trustee for cure purposes. On the other hand, a court that takes Argentina's/Adam's view of payment, would be inclined to interpret "all other Events of Default" in your comment as referring to events other than missed payment.

My hunch is that default is a much more likely reading. Besides, 50>25, so the accelerators' way is easier. But as one creditors' counsel said, acceleration feels good the day you do it. Then what?

I find it highly unlikely that any contract law competent court would accept that the subordinate text about 'Paying Agents and Transfer Agent' should supercede the clear language defining what constitutes a default.

If it did, Argentina could probably deposit the money in an Argentine bank, which ought to pass it on to e.g. Bank of New York Mellon, but did not, and the country should then not be in default.

The definition of default in the original prospectus for Argentina’s 2005 debt exchange (official Argentine source: gov.ar).

"Notwithstanding the foregoing, Argentina's obligations to make payments of principal and interest on the New Securities shall not have been satisfied until such payments are received by registered holders of the New Securities."

http://www.sec.gov/Archives/edgar/data/914021/000095012305000302/y04567e424b5.htm (p. S-67)
http://www.mecon.gov.ar/finanzas/download/us_prospectus_and_prospectus_supplement.pdf (p. S-67 (p. 74 in the .pdf))

Similar in the original prospectus for Argentina’s 2010 debt exchange (official Argentine source: mecon.gov.ar).

"Notwithstanding the foregoing, Argentina’s obligations to make payments of principal, interest or other amounts on the New Securities shall not have been satisfied until such payments are received by the common depositary (or its nominee), as registered holder of the New Securities."

http://www.mecon.gov.ar/finanzas/sfinan/documentos/us_prospectus_(version_ingles)_30042010.pdf (p. S-110 (123 in the .pdf))

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