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Pari passu realpolitik (big news, and a goodbye)

posted by Mark Weidemaier

The pari passu hearing is over and done and, as Anna Gelpern described, what a hearing it was. Perhaps most interesting was the panel's apparent openness to an alternative payment formula that wouldn't require Argentina to pay the full accelerated debt immediately. But it looked unlikely that such a compromise could be reached. The panel seemed unwilling to limit holdouts to payments equivalent to those received by exchange bondholders, and Argentina seemed unwilling to pay a penny more (and possibly not even that). That doesn't leave many options.

In an unusual move, the panel has reached out to break the impasse. It just entered an order requiring Argentina, by March 29, to specify "the precise terms of any alternative payment formula and schedule to which it is prepared to commit." In a sense, the order is an attempt to save face. The court clearly thinks Argentina should pay something, yet it is understandably hesitant to issue an order that Argentina will simply disregard. ("Not gonna happen," I think was the phrase used by Argentina'a counsel during Wednesday's argument...)

From start to finish, this case has involved a clash between one of the (perhaps the) most preeminent commercial courts, which hardly wants its credibility threatened by an openly defiant debtor, and a country determined, for its own political reasons, not to respect that court's judgments. Given the court's limited enforcement power in the sovereign context, that kind of clash calls for a negotiated solution. Yet as an institutional matter, courts aren't very competent at negotiating directly with the parties before them. Desperate times call for desperate measures, I guess... In any event, this is potentially big news, but only if Argentina is willing to budge a little. And if Argentina does budge, and the court enters an order imposing on NML whatever agreement the court strikes with Argentina, doesn't that seem an awful lot like a sovereign bankruptcy regime?

As a final note, this will be my last guest post for Credit Slips, though I'm happy to continue responding to comments on this or other posts. Thanks very much to Credit Slips for providing such a great platform for discussing matters related to sovereign (and other) kinds of credit.


Mark, THANK YOU. Your insights on pari passu, sovereign immunity, the courts, and more (and more and more) have been invaluable. I am sad to lose my partner-in-crime at what might just be the most dramatic inflection in the Argentina-Elliott saga, and will join the readers in scouring the media and SSRN for the your latest thoughts on this and all the rest.

Oh no!...as an obsessed reader of credit slips, I will hate to see you go. Thanks so much. It has been lots of fun reading you.

Thank you - fascinating as always. Do you believe the court might endorse an alternative payment form which does not include repaying in full the amounts owed to NML? If so, could the court effectively rewrite the contract so that Argentina no longer owes the remainder (as in a bankruptcy court), or, will NML still hold the legal claim for the residual which has not been paid, but be unable to enforce that claim in US courts?

AD: As I read the order, the panel is willing to overlook the acceleration but otherwise wants Argentina to propose a payment plan that will fully satisfy the terms of the "original bonds." I didn't get any sense the panel would accept a proposal that imposed some haircut. Perhaps it would, but it seems clear that the panel won't accept a simple offer to re-open the exchange. And as of now, it doesn't look like Argentina is willing to offer any more than that.

You make a good point about the effect of an injunction. I would assume that NML could also get a money judgment for the difference between (i) the full amount it is owed and (ii) the present value of any payment stream ordered by the court. In an ordinary breach of contract action, for example, if the remedy of specific performance doesn't fully compensate the injured party, it can recover a damages judgment for the rest. So in a sense, an injunction wouldn't really "re-write" the terms of the contract. Of course, if we assume the money judgment would go unsatisfied, the distinction might be purely semantic.

Thanks very much.

Professor, the comment about the bankruptcy regime by fiat is interesting, but also a little ironic. The CAC shift came in 2003, in part, because Mexico wanted to avoid a sovereign bankruptcy regime, which was being bandied about by some members of the official sector. After all that trouble, and adoption of CACs across NY-governed bonds from 2003 onward, it must be frustrating to have a pre-2003 bond (from Argentina, of all places!) stirring the bankruptcy pot all over again. It seems a lot like the end of a scary movie where, right before the credits roll, you find out the villain wasn't dead at all and is still out there, somewhere....

Also, a question: given the fallout from Assenagon and seeming inability to use exit consents under English law, do you think this gives further credence to the bankruptcy thought? (This is probably a separate issue altogether, I realize.)

K Drake: It's definitely ironic - although perhaps not more ironic than the utter failure of CACs to prevent holdouts in, say, Greece. After all the hullabaloo over CACs, it's funny that Greek local-law bonds (equivalent to the local-law Mexican bonds that launched CAC-mania in 1995) were easily restructured while the English-law bonds with CACs were not. I don't know. Was Groundhog Day a scary movie? I thought so.

As for Assenagon: I'm not sure the dust has settled. The level of coercion involved there was significant, arguably more than in most uses of exit consents. So there is probably room for continued use of the technique. On the flip side, many bonds now impose elevated voting thresholds before the terms typically targeted with exit consents (e.g., litigation rights) can be modified. Time will tell, but these contractual limits may prove a bigger deal than Assenagon.

I'm not sure the order was an attempt to break the impasse as much as it was they have a sleazy debtor in front of them taking muddy positions in argument, and they are forcing it to clarify its position for the record. I don't think the odds are high that Argentina offers up anything palatable to the court. This is a nation governed by leaders who have abused their own citizens' holdings of sovereign bonds (for example, by forcing pension funds to invest only in the government's inflation - linked bonds, then taking over the agency that reported inflation and then issuing inflation figures that are only 1/3 of the actual inflation rate). This a nation that has expropriated property of its own and foreign companies. They've failed to adjust their tax brackets for inflation that is running 25% or more. They imposed price freezes and banned advertising during labor negotiations. They are not going to come back with any kind of palatable proposal. Politically, the government's populist self-portrayal requires them to maintain the position they are in and not compromise.

mt: Expect you're right about Argentina's willingness to propose something palatable to the court. On the other hand, there might be enough wiggle room in the definition of what constitutes an "eligible claim" for purposes of the earlier exchange offers for Argentina to offer something reasonably attractive. Would domestic politics allow it? I don't know, but I understand your skepticism.

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