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Can Argentina Not Pay Yet Not Default? Perhaps. And Maybe There's Still a Route to NY State Court...

posted by Adam Levitin
A footnote to Mark's recent post on Argentina's remaining options got me thinking about what an Event of Default actually is under the exchange bond indenture. From a reasonably quick look at the (lengthy) documents, I think there might be a non-default route open to Argentina, and possibly also a procedural route to getting the pari passu clause interpretation in front of a New York State court. The exchange bond indenture para. 3.1 obligates the Republic to pay principal and interest "to the Trustee". The Republic is not obligated to pay the bondholders directly. That's the trustee's duty, if it is paid by the Republic, although the Republic has the option of directly paying the bondholders. Now, there is language in the Prospectus Supplement (page S-67) that:
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.
However, when one looks at the Indenture, this language appears only in the form of the debt security itself (exhibit C-2), not in the actual Indenture. The context of the language makes clear that it is an anti-mailbox rule provision making the obligation discharged upon receipt, not mailing because the preceding sentence explains that Argentina has the option of either paying the trustee or paying the registered noteholders directly. The "shall not have been satisfied" language immediately follows the direct payment option, which indicates that its purpose is to prevent Argentina from claiming that its obligation was discharged by putting the check in the mail. The "shall not have been satisfied" language does not apply when Argentina pays the trustee itself, which is the obligation in paragraph 3.1 of the Indenture.
So let's say I'm right here (and I think I am). If so, then if the Republic tenders payment to Bank of New York Mellon as the indenture trustee, then the Republic has fulfilled its obligation, and there's no event of default possible under the indenture (the EOD only occurs 30 days after failure to pay anyhow). At this point, I think the problem becomes Bank of New York Mellon's. Because of Judge Griesa's injunction, Bank of New York Mellon might refuse to accept payment from Argentina. Or BNYM might accept payment, but refuse to distribute it (more likely the former). Either course of action raises potential liability for Bank of New York Mellon to the exchange bondholders. Judge Griesa's injunction might be a defense, especially as the indenture provides that:
the Trustee will not be liable to any person if prevented or delayed in performing any of its obligations or discretionary functions under this Indenture by reason of any present or future law applicable to it, by any governmental or regulatory authority or by any circumstances beyond its control;
I think this tees up two intriguing scenarios that would potentially play well for the Republic. Scenario 1: No Payment, and No Default In the base scenario, Argentina avoids default by offering to pay BNYM, and BNYM declines the payment without any liability. Argentina, then hasn't paid anyone and still hasn't defaulted. The result is that the obligation remains in a sort of suspended animation. In theory this could continue indefinitely. But no default, so no cross-defaults, and the Republic gets to hold on to all of the funds (interest would accrue, but that's nothing different). This actually seems like a reasonably good outcome for Argentina, as it puts Argentina in a good position to force some sort of negotiated settlement and incentivizes the exchange bondholders to buy out the holdouts so that they can get paid on the exchange bonds. Scenario 2: Trustee Files an Article 77 Petition in NY State Court and Gets a State Court Ruling on Pari Passu Faced with the base scenario's strange limbo of no payment and no default, BNYM could go to New York Supreme Court with an Article 77 petition seeking advice from the state court about what it, as a trustee, is supposed to do. Article 77 is a rarely used procedure, but BNYM has used it before, such as in the $8.5 billion Bank of America MBS settlement. What is particularly appealing about Article 77 here is that it is a very open-ended, ill-defined inquiry. That means that it might be possible to get the NY State court court to rule on the interpretation of the pari passu clause (perhaps through an intervention by the Republic in the Article 77 proceeding). If that happens and the Republic got a favorable interpretation, then the Republic could then turn around and seek to get the federal court to rescind its injunction on something like a Rooker-Feldman doctrine basis. At the very least, going into state court with an Article 77 proceeding would buy the Republic some time, and it might be a way to get to what the Republic really wants, which is a New York State court ruling on pari passu. This would all take some good lawyering and a state Supreme Court justice who was willing to listen past the fact of the federal injunction, but it's not a crazy procedural route for the Republic to pursue. It's not clear to me whether BNYM would go this route or if the Republic or friendly exchange bondholders could coax/threaten it into an Article 77 proceeding, but the point is that there might still be some litigation routes open to the Republic.


Anna Gelpern has argued to me that the "shall not have been satisfied" language applies not just to direct payment by the Republic, but also to payment via the Indenture Trustee. That may well be correct. If so, then my scenarios are both much weaker, although the uncertainty about what the "shall not have been satisfied" language might be enough to give the Republic a moment not to pay BNYM and then for BNYM to run to an Article 77 proceeding when faced with demands from the exchange bondholders.

I understand the US courts to be telling the Republic that its partial debt restructurenwith 93% is invalid under the loan documents. If I were a holder of the restructured debt at that point, I would declare my restructured debt to be in default. If I were Argentina, I would welcome an opportunity to start over with a clean piece of paper and I would ask Griesa to oversee a resolution that includes all holders. If I were Griesa I would get all parties to agree to play by Bankruptcy Court rules and the determinations of a rent-a-judge. The case illustrates the impossibility of resolving defaulted debt on a piece meal basis. It shows the need for a mechanism to resolve sovereign debt defaults where under certain defined conditions a court can cram down a restructure on all parties. Generally that means a payout plan which the debtor can likely perform at a minimum repays all principal without much regard formthe time value of money. argentina desperately needs a resolution that permits it to access new dollar loans, whether from the IMF or the markets. It has reached the end of its capacity to extinguish debt from internal cash flows. The Republic, for all its experince with borrowing and defaults, does not think like a capital markets participant. They are trying hard to preserve the roughly 70% discount they got in the restructure at the price of exclusion from new borrowings. They need to be thinking how to get the price of existing bonds high enough that the distresed securities heldfe funds can trade them for an acequate return on investment. That this is not exactly the same as paying the vultures, as they call them, is not understood by Kicilof and Christina is locked into a us versus them mentality. Griesa could resolve this equitably if he is capable of overcoming his emotional responses.

I don't see how Argentina can get pari passu litigated in NY state court given the issue has been decided in federal court, so Rooker-Feldman would not come into play. The original bond contract provided that any court state or federal in the City of New York had jurisdiction so the forum shopping boat already sailed. Griesa would no doubt see Argentine intervention in an Article 77 proceeding as an attempt to end run him (as would the 2d Cir) which would chill the Trustee from bringing such a proceeding. Not that I am sympathetic to the bond holdouts

Even under your favourable interpretation where "shall not be satisfied" applies only to direct payments I don't see how scenario one can arise.

If the language in para. 3.1 obligates the Republic to pay principal and interest "to the Trustee", but the trustee refuses to accept payment (which you deem more likely than accepting and not being able to disburse), then payment of principal and interest to the trustee has not occurred. The language makes no allowance for the trustee refusing payment, so the stark outcome of the clause would be that it is not satisfied surely?

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