The Boy Scouts of America Filed Chapter 11 . . . in Delaware???

As you almost certainly have seen, early morning, Tuesday, February 18, the Boy Scouts of America (BSA) filed chapter 11 (Case No. 20-10343). The filing solely was motivated by the deluge of sex abuse claims filed against BSA. There currently are approximately 275 lawsuits pending in state and federal courts across the country. The case raises a host of issues--from litigation consolidation and multi-district litigation to limited liability to ensuring that survivors have a voice in bankruptcy and in their pending cases. I intend to take up those issues later a longer post. There is one issue particular to bankruptcy worthy of noting in this separate post.

Venue. How did BSA, with its national headquarters located in Irving, Texas, file in the Bankruptcy Court for the District of Delaware? As disclosed by the restructuring adviser to the BSA, on July 11, 2019, a non-profit limited liability company, called Delaware BSA, was incorporated under the laws of Delaware. The sole member of this company is BSA. Delaware BSA's principal asset is "a depository account located in Delaware."

Besides at its national headquarters, other employees are located at the BSA’s warehouse and distribution center in Charlotte, North Carolina. Still other employees work at "approximately 175 official BSA Scout Shops located throughout the United States and Puerto Rico and at the BSA’s four high adventure facilities located in Florida, Minnesota and parts of Canada, New Mexico, and West Virginia." I wonder who, if anyone, works at the Delaware BSA. And who involved in the bankruptcy case itself has any true connection to Delaware. BSA's attorneys are from Chicago. None of the creditors on its list of 20 largest creditors have addresses in Delaware.

In short -- Why Delaware? Will we see a venue transfer motion soon? Is this an(other) example of why venue reform remains necessary?

The Milken Pardon and the Trump Connection?

There's something really surreal about Donald Trump's pardon of Michael Milken. Trump and Milken were (with Ivan Boesky) the leading symbols of the excesses of capitalism in the 1980s. And here we are today. 

It seems that whatever Trump does, there's always a previous Trump tweet or quotation, and this time doesn't disappoint. Here's what a certain Donald J. Trump was quoted in 1990 in the NY Times regarding Milken's jail sentence:

"It's a very tough sentence. When you see that muggers and murders don't get as hard a sentence, it seems very tough. It may serve as a deterrent. If it does, then it will be a wise sentence."

In fairness to Trump, it's hard to see Milken's prosecution as having served as a much of a deterrent. But then, Milken went to jail for the wrong thing. He ended up pleading guilty to some (relatively minor) securities law infractions involving inaccurate securities filings in a case brought by the US Attorney Rudolf Guiliani (!). Milken was never prosecuted for his much more serious and complicated wrong-doing.

Debt limits ... and poison pills

The Russian Duma last week adopted on first reading a bill that attempts to solve the biggest problem with the new Russian personal insolvency law, but the bill contains a poison pill provision that will all but kill its effectiveness if the bill makes it past the second and third readings and becomes law.  The problem lawmakers are trying to solve is that far fewer than the anticipated (and desired) number of overindebted individuals are seeking relief. While policymakers estimate a stock of nearly 800,000 potential debtor-beneficiaries of the new bankruptcy relief, only a small fraction have applied, mostly due to the prohibitive cost of the procedure. The obvious solution? Make it less expensive by cutting out the needless and counterproductive formalism, especially the court process. Well, while that message is clearly reflected in the new bill and its proposed solution, the poison pill is in a different and easy-to-miss access restriction: The proposed out-of-court procedure (run and financed by self-regulating organizations of insolvency trustees, a clever and unique approach) is available only to debtors with no seizable income or assets and less than 50,000 rubles (US$2000 PPP) in all bank accounts over the past three months ... and with a total debt burden of no more than 500,000 rubles (US$20,000 PPP, or about $10,000 using official exchange rates). The estimate of 800,000 expected debtors, by the way, includes only individuals with more than 500,000 rubles in debt, so this new bill will not make any headway at all toward solving the existing problem. The English bankruptcy system has struggled with a similar problem of overly complex and therefore expensive access, too, and the English have "solved" this problem in a similar way, by making light-admin Debt Relief Orders available only to debtors with debts below £20,000. English analysts have estimated that more than 75% of bankruptcy debtors meet the "no income, no asset" DRO restriction, like that in the new Russian law, but the debt ceiling excludes them from the cheaper and more efficient form of DRO relief. This is pernicious and counterproductive, as Joseph Spooner argues in his terrific new book (see pp. 122-30). What is the purpose of excluding no-income, no-asset debtors from an efficient bankruptcy procedure because they have too much debt? It is extremely disheartening that the otherwise very clever and progressive new Russian NINA procedure contains the seeds of its own undoing. The new clinic will not treat patients with anything more than a common cold.

Venezuela, Lebanon, and Tools to De-Fang “Rush-In” Creditors

A follow-up on my exchange with Mitu (parts 1, 2, 3, and 4) about whether a judgment-holder is bound by the terms of a restructuring accomplished via a sovereign bond’s collective action clause (CAC). The broader concern is that “rush-in” creditors—bondholders who file suit and obtain money judgments, thereby escaping the effect of any modification vote pursuant to the CAC—might jeopardize the prospects of a successful restructuring. Again, the subtext here is Venezuela, and perhaps Lebanon as well.

Note that, although my discussion with Mitu focused on CACs, one could have the same discussion about other bond provisions. Consider acceleration provisions. For example, what if 25% of bondholders vote to accelerate the bond, and a plaintiff subsequently gets a judgment for the full amount of accelerated principal, but then a majority of creditors vote to rescind the acceleration? The short answer to both questions is that the subsequent vote has no effect on the judgment holder. As I noted in my earlier posts, that’s not to say subsequent events like these can’t have an effect; it is just that they are not likely to have one in the ordinary course of events.*

The reason is quite simple. It is that the judgment is an entirely separate source of rights from the underlying legal claim that produced it. This is a practical consequence of the “merger” doctrine, which provides that a judgment extinguishes the plaintiff’s claim (not the contract, the claim). Thereafter, the plaintiff can’t bring another action on the same legal claim but can bring a subsequent action on the judgment. (Such an action differs from judgment enforcement proceedings such as attachment and execution, but we’ll set that detail to one side.)

We can simplify--and avoid discussion of "merger" and associated legal doctrines--by focusing attention away from CACs and onto other bond provisions, which can more plausibly be modified in ways that will affect judgment holders. Consider the following sequence:

(1) The sovereign defaults and investors have a claim to bond principal (whether because the bond was accelerated or because the default was a failure to pay the principal when due);

(2) A plaintiff holding a minority in principal amount of the bonds sues and gets a money judgment for the full principal owed on those bonds;

(3) Thereafter, the issuer conducts a debt exchange in which participating bondholders vote to modify the exchanged bonds by removing the waiver of execution immunity.

Would this modification affect the judgment holder? Of course it would—at least, assuming courts do not reject this use of the exit amendment as unduly coercive.

The Big Lie Lives On

The Big Lie just won’t die. The Big Lie, of course, is The Government Made Me Do It theory of the financial crisis, that the housing bubble whose collapse set off the crisis was the product of government policies encouraging affordable home mortgage credit.

A video emerged recently of presidential candidate Mike Bloomberg espousing the Big Lie, and incredibly, the New York Times is running an op-ed that defends the Big Lie. Most of the op-ed comes verbatim from a new book by Christopher Caldwell. Caldwell has written a remarkably misleading piece about government affordable housing policy. It misrepresents that actual legal requirements, gets the relationship between the GSEs and private securitization market entirely backwards, wrongly implies support from scholarship that is saying something altogether different, and relies on outdated scholarship. I get that Caldwell isn't a housing finance expert, and his book is a trade book on the welfare state, but this is exactly the sort of silliness that happens from drive-by analysis. I'm pretty sure that the Times wouldn't run unsourced climate denial claptrap, but this is the housing finance equivalent. Let me highlight several examples.  

Pre-1949 Chinese Bonds: How Much of a Litigation Threat Do They Pose?

As part of the international debt class that I'm teaching this term with Steve and Lee, we spent a couple of sessions discussing the various lawsuits that have been brought in US courts over China's defaulted pre-1949 debt.  The discussions have been a lot of fun because the students have had interesting perspectives on the question of whether the governments of mainland China and Taiwan need to continue to be concerned about these irritating lawsuits popping up (especially in the age of Trump, given that some of his ardent supporters in Tennessee appear to be big and vociferous holders of these antique debt instruments).

Among the interesting issues that were discussed were whether China's persistent refusal to even engage the debt holders amounted to the kind of "uniquely recalcitrant" debtor behavior that resulted in the New York granting an injunction against Argentina in the infamous NML litigation in 2011 and 2012. This is important because an NML type argument, via the priority clauses in a number of the old Chinese loans (particularly those that were issued in US dollars and via US banks), could be the key to resuscitating these old claims.

Reading cases such as Jackson v. PRC, and especially the US Statement of Interest that was filed there, are enough to convert even the most ardent legal formalists into realists. And, if so, the fact that the present inhabitant of the white house has (maybe, kinda . . .) shown more sympathy towards these holders of antique Chinese bonds than any prior US president in over a half century may be quite relevant.

I've asked our students, if they are willing, to post their views on these matters in the comments (and maybe even links to their papers).  They are quite interesting.

Judgments > CACs!!!!

There is a subtext to my recent exchange with Mitu (here, here, and here) about whether a judgment-holder is bound by a subsequent vote to modify a bond’s payment terms, and it is of course Venezuela. U.S. sanctions prevent a restructuring of Venezuelan debt, and this long delay creates a window in which many creditors might obtain judgments. (It hasn’t happened but, you know, it’s a thing that could happen.) Mitu’s disarmingly “simple-minded” query in his most recent post is (of course) quite sophisticated. Might we view the CAC as an inter-creditor undertaking, such that, for example, after a successful restructuring vote participating bondholders could sue judgment-holders for a pro-rata share of any recovery the judgment-holder had managed to extract?

Before I go into a more detailed reply, a general comment. If one thinks that inter-creditor rivalry is a problem in sovereign debt restructuring—and a decision to litigate early is a form of inter-creditor rivalry, in the sense that a litigating creditor hopes to (i) avoid the effect of a restructuring and (ii) potentially earn a priority claim to the proceeds of any sale of attached sovereign assets—then one will want to find ways to limit inter-creditor rivalry. Perhaps the most elegant solution is to posit the existence of inter-creditor duties. I’m not entirely sure what Mitu has in mind when he posits a duty to “accept a supermajority [restructuring] decision.” (He’s raising this as a question, not necessarily insisting that the duty exists, but I’ll treat it as his proposal—hopefully that’s not too unfair.) Would the breach of that duty give rise to a cause of action for damages—measured, say, by any delay in resumption of payment caused by the lawsuit?* Would it require the judgment-holder to share with restructuring participants the proceeds of any recovery on the judgment, to the extent the recovery exceeded the NPV of the restructured bonds? I suspect this latter option is what Mitu has in mind, because it would eliminate incentives to litigate (or “rush-in,” as Steven Bodzin puts it). It would also be consistent with clever transaction structures that Mitu and Lee Buchheit have proposed elsewhere, which are designed to force holdouts to share any recovery with restructuring participants.

But here’s the thing. It might be a great idea to de-fang holdouts (or, in this context, rush-ins) like this. It would also be a great idea for every reader of this blog to send me $100. Alas, the modification provisions in sovereign bonds require neither thing.

Judgements, CACs and Civil Procedure Quicksand

Mark's post below on whether obtaining a judgement is a clever way of getting around the threat of a cram down via a CAC is unsurprisingly superb.  Pharo's strategy, Mark says, is not at all crazy.  If he is right -- and I have learned over the years of working with Mark that he is almost always right -- then this strategy is going to be relevant not only in Venezuela, but in Argentina as well. It creates the problem, to quote Steven Bodzin of REDD Intelligence, of Rush-ins (as opposed to holdouts).

Interestingly, thanks to an old friend who has a doctorate in international civil procedure and follows these things, I discovered an old IMF paper where the IMF legal gurus (Thomas Laryea and Sean Hagan, most likely) had flagged this issue of judgements potentially undermining CACs for their board as far back as 2003--04. Paragraph 43 of the March 22 Report to the Board titled "Recent Developments in Sovereign Debt Litigation" basically supports Mark's view and warns the Board of precisely the complications we are discussing fifteen years later.  If one wants to go down the rabbit hole here, as I suspect the folks from Pharo have gone, the implications for the resuscitation of an Elliott-style pari passu attack via a judgement are significant. But I'm not wading into that quicksand now.

Now, to return to the question of whether Judgements do indeed quash CACs and to continue the discussion with Mark (with the caveat that he knows best), I have a simple minded query for those who are confident about that conclusion (I'm not confident either way). Take the following:

You and I enter into a contract to lend $100 to Mark. The contract also says that if Mark does not pay on the maturity date, you will refund $50 to me out of your own pocket.

Mark doesn't pay and you get a judgment against him.

Have you avoided paying me the $50?

Sharpened, the issue is whether a CAC is a form of intercreditor undertaking by which each holder promises to all the others that it will accept a supermajority decision about the treatment of the credit in a distressed situation.

After all, the clause does not say the modification "will be binding on all holders until the moment they receive a judgment". It says "binding on all holders".

And if Griesa/Baer are right that the bond continues to have legal vitality even after the awarding of a judgment, is this really so far-fetched?

Judgments > CACs

Mitu’s post from two-days ago frames an important question. An investor holds a defaulted sovereign bond that includes a collective action clause, sues, and gets a final judgment for the full amount of the outstanding principal. Later, a majority of the remaining bondholders vote to restructure the bond’s payment terms—say, by accepting a 50% haircut. Is the judgment-holding investor somehow bound by this decision? If not, doesn’t this allow prospective holdout investors to circumvent the CAC by rushing to court to get a judgment? Let’s call this the judgment-trumps-CAC argument. Mitu’s post nicely highlights the importance of this question and some of the legal uncertainties. He also describes the judgment-trumps-CAC argument—tongue partially in cheek?—as “not crazy.”

Indeed, the judgment-trumps-CAC argument is not crazy. It is super-duper not-crazy, to the point of being unquestionably correct.* So it seems to me, anyway. Conceivably, a sovereign could use the bond’s subsequent modification as a basis for seeking relief from the judgment, though I wouldn’t fancy its odds of success. But absent such a development—which, importantly, requires judicial intervention—the judgment-holder can enforce the judgment.**

Without getting bogged down in detail, here are just a few reasons why.

Do Judgements Trump CACs?

(Thanks to Steven Bodzin of REDD Intelligence for flagging this matter; he has an aptly titled piece on this out today “Venezuela Bondholders Seek Judgement Ahead of Collective Action Clause Activation”).

A few weeks ago, I put up a post on the what I thought was an interesting and innovative set of arguments being raised by Juan Guaido’s team in the Casa Express/Pharo Gaia v. Venezuela litigation in New York (here).  I was especially interested in the argument that an obscure customary international law doctrine of necessity (i.e., things are really really bad in my country, so I can’t pay just yet) justified the court granting a stay in the litigation.  This argument was tried in a series of arbitral proceedings under bilateral investment treaties by Argentina in the wake of its 2001 crisis and it had mixed success.  But it has never before been raised in a New York court, under a garden variety New York law governed contract.  So, the judge will have to decide whether this international law defense is even admissible in this context or whether the only excuse defenses allowable are those from New York contract law (e.g., impracticability, duress, unconscionability, etc.). And then, assuming the judge rules in the affirmative, the question will be whether the necessity defense applies in this context. 

At the end of last week, the creditors submitted their counter arguments.  As expected, they expressed outrage and shock that the debtor would seek to bring in a defense from the outlandish world of customary international law into their precious New York law contract dispute arena.  But buried in between the outrage was a point that may well open pandora’s box. 

On page 5 of the creditor submission, in explaining why the grant of a stay would harm them and, therefore, should not be granted, the creditors say:

[The] threat [of prejudice to the creditors’ ability to recover] is magnified here by the collective-action-clauses in the 7.75% 2019 bonds which allow a supermajority to bind nonconsenting creditors to the terms of restructured bonds. . . . A judgment would protect the Pharo Plaintiffs who hold beneficial interests in the 7.75% 2019 bonds – from such compulsory restructuring of their debts. (emphasis mine).

The last sentence is worth reading again.

216 Jamaica Avenue and the Prospect of Breathing Life Into Antique Chinese Bonds

One of the more fun discussions we have had in my international debt class this term has been the question of whether a clever plaintiff's lawyer might be able to breathe life into defaulted Chinese bonds from the period 1911-1948. (Our thanks to Tracy Alloway's delightful piece in Bloomberg on this matter (here)).

Part of our inspiration for this discussion, however, was also reading an enormously fun 2008 Sixth Circuit opinion from Judge Jeff Sutton, in the 216 Jamaica Avenue case (here). The context of the case was the abrogation of gold clauses 1933 that we've discussed before on this site (here, here and here).  What we have not talked about, however, is what impact the removal of that 1933 prohibition on the use of gold clauses in 1977 had.  For long-term contracts that were written in the early 1900s that then had their gold clause index provisions abrogated in 1933, the 1977 law arguably re activated them.  Congress tried to stop most of the attempts at reactivation.  But for the cleverest of lawyers, there was always going to be a way.  For these contract arbitrageurs, scouring old contracts for lottery tickets through the re activation of these old clauses that everyone else has long forgotten is fun. It certainly was fun for us to read about (Congrats, Cooper & Kirk, who note their victory in this case on their website (here)).

As a general matter, courts don't tend to be very sympathetic to lawyers trying to reactivate old clauses to earn giant lottery payouts.  But in 216 Jamaica Avenue, that's precisely what happened. The opinion is an absolute delight, not only because of the wonderful facts and analysis of basic contract law matters such as "meeting of the minds" that befuddles most first-year students (and me), but also because it is written in a style that is reminiscent of the classic Richard Posner opinions; short, incisive and witty.   

I'm hoping that my students, if they find interesting ways in which to overcome the significant barriers to bringing suit on the antique Chinese bonds -- namely, the statute of limitations and jurisdictional hurdles -- will post about them in the comments.  The barrier is high though, despite Mr. Horatio Gadfly's optimism some years ago (here and here).

I do wonder though whether the Chinese (and Russian) governments will some day soon decide that they should just enter into global settlement with the owners of these antique bonds for pennies on the dollar and stop the periodic pesky lawsuits. Otherwise there will come a day where someone somewhere figures out a way to do a set off or restart the statute of limitations. 216 Jamaica Ave points in that direction.

Daniel Schwarcz on the Evolution of Insurance Contracts

I shudder even as I write these words, but I’m increasingly fascinated by insurance contracts.  If you are interested in the processes by which standard form contracts evolve – which I am -- then you can’t help but be sucked into this world. Coming from the world of sovereign bonds, the insurance world strikes as bizarre. Among the wonderful authors whose worked has sucked me in are Michelle Boardman (here), Christopher French (here) and Daniel Schwarcz (here).

There are a handful of major players who dominate the insurance industry and everyone seems to use the same basic boilerplate terms tied a core industry-wide form. Further, courts aggressively use an obscure doctrine, contra proferentem (basically, construing terms against the drafter/big bad wolf), that is often ignored in other areas such as the bond world where figuring out who did the actual drafting is a near impossible task.  Finally, while contracts in this world are often sticky and full of long buried flaws, they are also sometimes highly responsive to court decisions. In other words, there is much to be learned about the how and why of contract language evolution as a function of court decisions (a process about which most law school contracts classes make utterly unrealistic assumptions and assertions) by examining insurance contract evolution and comparing it to contract evolution in other areas that don’t share the same characteristics.

My reason for this post, is to flag a wonderful new paper by Daniel Schwarcz of U. Minnesota Law. The paper, “The Role of Courts in the Evolution of Standard Form Contracts” (here) is on the evolution of insurance contract terms in response to court decisions.  Unlike much of the prior literature on standard form contracts where each paper examines no more than a handful of terms and often finds that contracts are not very responsive to particular court decisions, Daniel examines a wide range of terms (basically, everything) over a long period of time (a half century) and finds a great deal of responsiveness to court decisions.  The question that raises is whether there are features of the insurance industry that are different from, for example, the bond world.  Or whether Dan just studied a lot more changes than anyone before this had done; and, therefore, he was able to see further than prior scholars.

Elliott Rocks (Strikes?) Again

Holdout hero Elliott Management, the king of holding out until it gets what it wants, scored itself a nice Christmas bonus. The hedge fund won a long game of chicken with Ireland’s government over junior bonds issued by Anglo Irish Bank by getting its money back in full. If you understand the law, it pays to be stubborn, writes the FT’s Rob Smith (here).

I have written critically about Elliott Associates and their creative use of the pari passu weapon against Argentina. But I cannot help but admire their skills.  Plus, from a long term perspective, maybe they do force us all to pay more attention to the terms in our contracts -- because, if we don't, they will eat our lunch. Everyone who took the deal offered by Allied Irish got 20 cents on the dollar.  According to Smith's piece, Elliott got 100 cents. Wow.

There is a lesson here for whoever is designing Argentina's latest restructuring.

The Bajan Debt Restructuring - 2018-19

Following in the footsteps of their mammoth restructuring of Greek Debt in March 2012, Andrew Shutter, Jim Ho, Lee Buchheit, and their team utilized the same "local law advantage" to design the restructuring of the Bajan debt in 2018-19.  Andrew, one of the gurus of the sovereign debt field, has just put up a super paper on this (here). The paper describes not only how the restructuring was engineered, but also the ways in which the strategy utilized was different from that used for Greece. There is also the use of an innovative "hurricane" clause in the new post-restructuring bonds that is worthy of a whole article in and of itself (some of the other Caribbean borrowers that Andrew and Lee worked with in recent years have also used this clause, but others could sure have used it as well -- and I'm thinking of Puerto Rico in particular here).

I'm particularly interested in how the holders of foreign-law bonds were induced to enter the deal, without significant holdout problems.  My guess is that they were paid a pretty penny.  But on that specific question, Andrew does not show all of his cards.

To this date, there has been precious little writing about this very cool operation in Barbados.  So, as someone who teaches in this area, I'm especially grateful to Andrew.  I'm also jealous that he probably got to go to Barbados a lot. 

 

 

Venezuela’s Weird (and Possibly Mythical?) Prescription Clause

Mark Weidemaier & Mitu Gulati

Ben Bartenstein at Bloomberg has a provocative article on “prescription” clauses in Venezuela’s post-2005 sovereign bonds. As he explains, these clauses arguably modify the statute of limitations that would otherwise apply to bondholder claims, creating a “loophole” that might cost investors billions. Beginning in 2005, the Republic’s bond prospectuses began to include language like this (from a bond maturing in 2026):

Claims in respect of principal and interest will become void unless presentation for payment is made within a period of ten years in the case of principal and three years in the case of interest from the Relevant Date, to the extent permitted by applicable law…

As Bartenstein notes, the meaning of the clause isn’t entirely clear. But he suggests that it might be interpreted to “let Venezuela off the hook on unpaid interest to any creditor after three years—provided the creditor doesn’t take legal action seeking repayment during that span.”

This is a great find by Bartenstein, and he’s right to highlight the risks associated with the clause. But we doubt the clauses have this effect. Actually, we’re not sure the clauses even exist. But first, some background. (Full disclosure: One of us (Mitu) talked to Ben about his find and was rather unhelpful to him; not even having been aware of these clauses prior to Ben flagging them.)

The "Necessity" Defense in Sovereign Debt Cases

My international debt class this week discussed the US Supreme Court’s gold clause decisions from 1935; and, in particular, US v. Perry. This is one of my favorite topics, in part because the events that occurred are so surprising to most students (as they were to me). Plus, there is some wonderful writing on the topic including a 2013 law review article by Indiana U Law School’s Gerard Magliocca (here) and a 2018 book by UCLA Economic Historian Sebastian Edwards (here).

For those who don’t know this case, basically the US imposed a massive haircut on its lenders by abrogating the gold clauses in its debt contracts via Congressional action in 1933.  Creditors yelled bloody murder and sued, and the case quickly made its way to SCOTUS.  There, the government, which didn’t have very many strong legal arguments on its side, threw itself at the court’s mercy and pled that the court deny the creditors’ claims on public policy grounds. That is, that the country was in such a deep crisis – arguably the worst it had ever seen – that extreme steps (such as the abrogation of a contract term) needed to be taken to improve general welfare.  It was a Hail Mary pass, and it worked even though the justices had to hold their noses and rule.  The Court ruled in a somewhat bizarre fashion, finding a constitutional violation but no damages.  The bottom line though was that the government won.  Better still, the US economy recovered and lenders became even more eager to lend to the US than they were before. (see here and here).

The question raised by Edwards and Magliocca though is whether we might see the use of this extreme necessity defense ever again.  And it turns out that there is a sovereign debt case going on right now, in January 2020, in a federal court in New York, where necessity is being raised as a defense. The country in question is Venezuela and the conditions surrounding Venezuela’s inability to pay are as extreme as they come (evil dictator, deep humanitarian crisis, broke government-in-exile stuck dealing with myriad lawsuits). The case is Casa Express Corp. v. Venezuela (Case 1:18-cv-11940-AT).  Question is whether, given that the crisis is occurring in a distant country as opposed to the US itself, the US federal court will find the appeal to “necessity” convincing in the same way that they did in 1935. (Venezuela is asking for a lot less relief in this case than the US was in 1935; Venezuela just wants a stay until Mr. Maduro can be induced to leave office and the IMF can help it prepare to deal with creditor claims).

Argentina’s Hundred-Year Bond and its Make-Whole Premium: A Spanner in the Works?

Argentina is on the brink of attempting a restructuring of its sovereign debt.  And, of course, that has attracted the birds of prey.  An article in Bloomberg a couple of days ago (here) reported that potential holdout creditors had hired expert lawyers to examine the fine print in Argentine contracts in the hope of finding a vehicle to support their litigation strategies.

Assuming that it is not going to be long before Argentina is in full restructuring mode, my question is whether an unusual clause in one of the Argentine bonds, combined with a recent case out of the Southern District of New York, might interfere with the Argentine government’s restructuring plans?

The clause is the Optional Redemption provision in the $2.75 bn hundred-year bond that Argentina issued in June 2017, with the hefty coupon of 7.125%.  Optional Redemption clauses, as my co authors (Amanda Dixon, Madison Whalen and Theresa Arnold) discovered in an analysis of over 500 recent sovereign and quasi sovereign issuances, are rare creatures in this market.  Fewer than 20% of all the sovereign issuers use them. Some, like Mexico, are frequent users. But others, such as Argentina, have used them only on rare occasion.

Oversimplifying, these provisions typically allow the issuer to call the bonds at a supra compensatory amount (somewhat misleadingly called the “make-whole” amount).  Our data suggests that such provisions were largely absent from the sovereign market in the period between the mid 1990s and 2010.  Somewhere around 2010 though, Issuer Call provisions with their “make-whole” premia began migrating into the sovereign world from the high-yield corporate bond market.  Precisely why the Issuer Call provisions are set at a supra compensatory amount is something of a mystery to me (Marcel Kahan and I discuss the mechanics of these clauses here).

What I’ve heard from lawyers and bankers in the interviews that Marcel and I did for our piece (here) is that high-yield corporates sometimes need to retire their old bonds to they can escape onerous covenants (for example, to engage in a lucrative merger).  And to do that they are willing to pay a high amount – that is, a supra compensatory “make-whole” premium. In the sovereign context though, not only is there not going to be any lucrative merger, but the covenants are not all that onerous such that issuers would want to pay a big premium to get out of them.  But maybe there are countries that think that their current borrowing costs are unduly high (e.g., the 7.125% coupon on Argentina’s 100-year bond) and that these costs will surely go down some day in the future.  That, in turn, will make the redemption option valuable to that optimistic issuer. And, maybe, like Argentina was in June 2017, the issuer will be willing to promise pay a high amount to creditors if conditions ever become so positive that it wants to retire substantial amounts of its high coupon debt. Alexander Hamilton certainly thought so in the Report on Public Credit in 1790 (here).  Things haven’t quite worked out for Argentina in the manner that they did for Hamilton and the US.  But a hundred years is a long time. 

Now, you might ask, why is an Optional Redemption clause relevant in the context of an attempted sovereign restructuring?  After all, an Issuer Call option and should only be relevant where the issuer chooses to exercise the option.  And Argentina is seeking to get creditors to take haircuts, rather than exercise its redemption option.  Remember, the redemption option typically requires the issuer to pay a supra compensatory amount (because it is intended to operate in a state of the world where things have improved so dramatically for that issuer that it wishes to retire the debt) – which is the opposite of the haircut that Argentina needs to impose currently (because things have turned terrible for Argentina).

The answer has to do with a New York case from late 2016, Cash America v. Wilmington Savings.  Drawing from a blog post that Marcel Kahan and I did for the Columbia Law School Blue Sky Blog a couple of days ago, here is the story of the case:

Bond indentures [for high-yield corporate issuers in the US] commonly contain what are called “make-whole” provisions that give the issuer of the bonds the option to redeem the bonds, at a premium over par. Bond indentures also contain an acceleration clause that gives bondholders the option, upon an Event of Default, to demand immediate payment of the principal amount and receive par. To reiterate, redemption is an option of the issuer while acceleration is an option for bondholders.

In Cash America [v. Wilmington Savings], the issuer was found to have violated a covenant in the bond indenture, thereby generating an Event of Default.  The court ruled that when the issuer engaged in a “voluntary” covenant breach, holders are entitled to receive as a remedy the amount they would have received upon redemption, that is a premium over the amount receivable under the acceleration clause.  [And that redemption amount was a supra compensatory “make-whole” amount].

Mick Mulvaney's South Carolina Land Shenanigans All Under Seal

Last year the Washington Post covered Mick Mulvaney's South Carolina land deal gone sour. It was a pretty amazing case that is fantastic for teaching purposes. Mick's moves would have made some of the most sophisticated distressed debt funds (not to mention a real estate developer president) blush with shame (or green with envy).

I've got an update on the case that appears quite troubling: it seems that the South Carolina court has put everything except the docket entry list under seal, including previously public available documents. If I am correct, this is really disturbing because would indicate a willingness by the South Carolina court system to accommodate Mick's desire to shield keep his business dealings from any public scrutiny, even though there is no legitimate reason that I can see for the court to turn seal all the documents in a public judicial proceeding about a commercial real estate foreclosure action.