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Argentina: The RUFO Crazy

posted by Anna Gelpern

Kudos to Joseph Cotterill at FTAlphaville for an excellent post on the obsession with the Rights-Upon-Future-Offers (RUFO) clause in Argentina's restructured bonds, which seems to be driving Argentina to a payment default on those very bonds. Judge Griesa is not buying it, though --  at a hearing on July 22, he again denied the Republic's request for a stay of his orders blocking restructured bond payments, unless Argentina pays the holdouts pro rata. He also deferred the hugely consequential decisions on paying creditors under English and Argentine-law bonds; that mess is for another post.

RUFO is basically a close cousin of the pari passu monster. It is a promise by Argentina to the restructured bondholders that, should it give holdouts more favorable terms, the restructured bondholders would get the same. So if NML and friends get 100 cents plus exorbitant past-due interest on the defaulted 1994 bonds, the restructured bondholders get to claim the same for themselves. The ever-un-dramatic Argentine press has done the math, and came up with a $500 billion bill. Meanwhile, some distressed investors holding the restructured bonds are gleefully rattling the RUFO sabers (classier than a lottery ticket!) ... while concerned citizens in Argentina are threatening to sue government officials for saddling the state with $500 in new debt.

Here is what it would take for a RUFO payday to materialize in New York:

1. Exchange bondholders would have to get 25% of their colleagues to vote in favor of suing on the RUFO clause and to indemnify Bank of New York Mellon as Trustee for the costs of the caper, so it can sue on their behalf (see Section 4.8 here--curiously, the 25% seems to key off the entire stock of debt issued under the indenture, not a single series--but that may be a drafting detour).

2. A federal court in the Southern District would have to decide that a settlement of outstanding litigation is in fact subject to the RUFO clause. For reasons previously rehearsed here and elsewhere, this is a strained interpretation. But you never know.

3. That same court would have to rule that a settlement that parks funds in escrow, so that it is not effective until the RUFO clause expires in December 2014, is still a violation of the RUFO clause. Ditto for any other workaround. At the July 22 hearing, Judge Griesa implied that RUFO issues can and should be addresed as part of structuring the settlement.

4. That same court would have to order specific performance of RUFO, or damages equal to holdout settlement terms, as a remedy for the violation. 

5. That same court would have to value the restructured bondholders' recovery to date, including upfront payments and GDP warrants, using the right discount rates, at the appropriately small fraction of NML's recovery.

6. Argentina, faced with a $500 billion bill, would pay up some meaningful fraction thereof. 

This chain of events would require the very court system that gave us the pari passu injunction to declare that in retrospect, it was an insane thing to do (true dat, but for very different reasons) ... and to prove it by blowing up the very settlement its injunction was designed to promote ... using a strained interpretation of a novel contract clause.

Argentina's brief basically says that RUFO claims would be baseless, but that you cannot count on the courts to be rational--an argument that must have endeared it even more to Judge Griesa.

I buy that in Argentina, officials might face a higher risk of liability for exposing the state to the remote contingency of paying out under RUFO than for the certain damage from a payment default. This says more about politics in Argentina than the law in New York.

In the end, this might all be a giant game of chicken. Regardless, it should make people think twice before agreeing to nuclear commitment devices like RUFO.

Comments

Excellent analysis as always. Do you attribute Griesa's failure to rule on Euroclear et al's clarification motion to incompetence, laziness, senility, or an improper bias in favor of NML? His attempt to enjoin payments on non- U.S. law bonds is clearly illegal and beyond the scope of of his jurisdiction. That he is forcing so many "innocent bystanders" to play a game of legal chicken when there is no honest argument for roping them in suggests a judge who is uninterested in the law and drunk on his own delusions of power.

I think the pari passu and the RUFO clauses need to be seen as part of the protections required by those who agree to restructure and take a haircut. Pari passu was never intended to give an advantage to holdouts. Griesa's rulings are intended to bring Argentina to the negotiating table, not make law. That higher courts have decided not to intervene in a clear cut contract dispute is narrow minded but not wrong.

As a negotiating strategy, Argentina needs to make the holdouts afraid that they will default on the restructured bonds, since that default would certainly postpone and diminish any payments tomthe holdouts while the whole mess is renegotiated. A risky but not implausuble strategy.

Besides trying hard to hold the exchange bondholders (92.4 per cent of Argentina creditors) hostages to force payment to the holdouts, Judge Griesa seems to have little understanding of what's going on, which speaks volumes about what's going on in NY.
The fact the Argentina government is not giving up has taken Griesa and his allies by surprise. Traditionally, Argentina has always knelt down--not this time. Paul Singer and company are not enjoying the amount of coverage that allows the world to better understand the extent of their predatory practices and the shortcomings of a world financial system that favours financial speculation over productive activity. In spite of all the propaganda, nothing will happen on J-30 because Argentina will not declare default, and reasonable avenues will have to be found so that the exchange bondholder can finally get their money--Griesa be damned.

Question: The day after:BNY has Argentinas payment but it´s blocked.
Can the Judge take part of the monies to pay the Hedge fund?.
Would that trigger the RUFO clause?.
Having had the Court take the monies, what would the BNY position be?.
Why doesn´t Argentina present to the court a new Stay measure?

Regarding the restructured bondholders, in the case of a default on those bonds, ¿how would the cross default and acceleration events work? Please, Anna Gelpern elaborate on that.

I'm glad to see someone with an independent and objective view of the Argentine bond situation.

I can't think of a single thing Judge Griesa has done that will improve the interests of the United States. Sovereign debt issues have global political consequences -- it shouldn't be just an 85 year old judge's narrow, parochial viewpoint. Especially since, as noted in the Times, he doesn't understand critical aspects of the case. After 10 years.

One of America's greatest strength globally is the relative impartiality of the Law. Including the idea that US jurisdiction is a benefit rather than a problem for global finance.

Aside from the legal issues, other than the IDSA and credit default holders, I don't know why global financial markets care about a technical default. I am assuming that after RUFO expires, Argentina will settle up. Financial markets care about cash flows. The 25 year bond yields have varied between 7% and 16%. They are now selling at 9%

http://www.investing.com/rates-bonds/argentina-25-year-bond-yield

The IDSA is frantic, because they have to rule on default on their own contracts. And Argentina is willing and able to make its June 30th payment, so the arguments regarding default will inherently be controvertible. Plus, the vultures are rumored to have bought Argentine Swaps. So they are in a position to profit from a default that they can control through pending litigation. Personally, I would like this to end up badly for one of the dealer banks. We may see just how good their risk management systems are post 2008.

Here are the problems I envision:

1. New York will decline as a popular legal venue for global debt. New York's status as a global financial center will not be helped.

2. The decision is tainted by association with hedge/vulture funds, political contributions, and connections. Regardless of the facts, it looks bad. And Senator Menendez has just weighed in blaming all the problems on Argentina. And why should a US Senator EVER publicly take sides with a hedge fund vs a large sovereign nation? The optics are awful.

3. A New York judge has the ability to control the behavior of global banks because of their branches in NY, but what is to prevent Russia or China to facilitate payments? Whatever happens, a overly broad ruling that is unenforceable is a bad idea.

4. We have had strained relations with Argentina for a decade and now we are adding fuel to that fire.

But the most serious is that Argentina is close getting rid of the current regime and try something new. Like some variation of capitalism. They have huge shale oil reserves. China and Russia have visited Argentina over the last month and put together trade deals. We are concerned about Russia's influence over Ukraine (for whatever reason -- all of them being bad) and ignoring influence of China and Russia in the Western Hemisphere. There will never be a better time to clean up our issues in Latin America.

We are giving Argentina no choice but to align themselves with China and Russia. Why in the world are we doing this to ourselves.

We are not "doing" anything to Argentina.

Any acts/actions "being done" to Argentina have been acts/actions of its own choosing and doing.

Argentina chose the language and the legal terms to include in the contract that would govern the so-called "Holdout," "Defaulted," or "Deadbeat" Bonds, and it was Argentina's US legal counsel (New York City lawyers) that included the insertion of the very term "Pari Passu," signifying that words, after all, DO have meanings, and that they were not put in the Indenture just for show.

Argentina chose New York as the jurisdiction whose law would apply in the interpretation and construction of the Indenture, and in the settlement of any disputes among Creditors versus the Deadbeat Republic of Argentina.

Argentina chose the U.S. Southern District of New York, located on the Island of Manhattan, as the sole venue where any disputes arising out of the Bond Indenture would be heard.

Argentina specifically waived any/all Sovereign Immunity issues by submitting itself to the jurisdiction of New York law, to be heard in a U.S. federal court within the S.D.N.Y., and it wound up with Judge Griesa. I say to "Wallace," that you can try to denigrate Judge Griesa's authority by calling him names and impugning his good name. This is a strategy taken straight from the play book of "Argentina Elvis" and "Crazy Cristina" of putting labels on their adversaries (e.g., "Vultures"), now that these Creditors decided that they did not want to take part in the Deadbeat Republic's plan to PUNK all of its Creditors. The fact that 93% of Creditors were coerced into having heavy discounted junk (once again) DEFAULTED bonds is of no consequence on the 7% of bondholder Creditors that "held out" for what is rightfully, and lawfully, theirs. The 7% are lucky to have been able to bankroll an army of lawyers that usually only a sovereign can afford. The 93% that folded like a cheap suit (no pun intended), may have been too scared to file suit against, may have worried about winding up with Zero cents on the dollars instead of the 30 cents that the deadbeat was offering it in 2005/2010.

In the end, it is completely IRRELEVANT as to why or how the Deadbeats were able to get so many "investors" (in Argentine bonds, is more akin to craps shooters) to take heavily discounted paper that has once again DEFAULTED (for whatever reason), whether the Deadbeat doesn't have the funds to pay, or whether it is willing to play ball with some of its Creditors that it "made nice with" during the bond exchanges, but in the end, Argentina MUST pay the 7%-ers or join the other deadbeat pariah nations of the world.

Whatever the issues, whatever the facts . . . Argentina can just go pound sand as far as I'm concerned.

Sincerely,

Up Yours, Argentina

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