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Argentina’s [Insert Adjective Here] Debt Crisis

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Okay, everybody ready? Argentina? Check. Debt crisis? Check. Cristina Kirchner and crew back in office to, um, right the ship of state? Check. Last time round, their plan involved hurling insults at a U.S. federal judge. Like Spider Man: Far From Home, it was briefly amusing, lasted far too long, and ended badly. Argentina eventually caved in 2016, paying handsome sums to creditors who had sued it in U.S. courts. We won’t rehash the details, but there is great coverage by Joseph Cotterill, Matt Levine, Felix Salmon, Robin Wigglesworth and others. We also covered it extensively here on Credit Slips.

Yes, sure, it would be nice to have a break of more than three years between the formal end of an Argentine debt crisis and the start of a new one. But here we are. Argentina has again borrowed many billions USD under New York law. This time, the legal issues will be a bit different, because Argentina’s debt stock has different legal characteristics. Below, we offer a few preliminary thoughts.

Voluntary Reprofiling

On August 28, Argentina announced a plan to conduct a “voluntary reprofiling” of debt (here). Reprofiling is a fancy term for maturity extension. That sounds gentle—just a flesh wound!—but a long maturity extension can impose a significant NPV cut. Plus, reprofiling might be just the first step on a path that leads to a brutal debt restructuring. Creditors will distrust rosy predictions that a reprofiling will fix the problem. Many will refuse to participate. What happens then? 

Last time around, after its 2001 default, Argentina’s NY-law bonds required the unanimous approval of all the creditors before any alterations to the payment terms could be made. That requirement, of course, magnifies the risk of holdouts. And in fact, Argentina spent the next 15 years engaged in various legal battles (e.g., here).

This time, Argentina’s bonds have collective action clauses, or CACs, which let a super-majority of creditors bind a dissenting minority. If Argentina gets the requisite proportion of creditors to agree, it can impose a reprofiling on the entire group. Of course, the devil is in the fine print.

The Different Types of CACs

Different Argentine bonds have different CACs. The first, often referred to as “Uruguay-style,” appears in bonds issued in the country’s post-default exchange offers in 2005 and 2010. These CACs let the government modify multiple series of bonds with the approval of holders of (i) 85% in principal amount of all affected series and (ii) 66.67% of each affected series. Let’s call this the aggregated, dual-limb vote. Alternatively, the government can ask each individual series of bonds to vote (i.e., without aggregating that vote across the entire affected debt stock). If it goes this route, it must win the approval of holders of 75% in principal amount of each series. The government will likely have a harder time restructuring its debt if it uses this series-by-series voting method (see here).

Assuming the government holds an aggregated, dual-limb vote—i.e., the route in which it must win 85% approval in the aggregate and 66.67% of each series—prospective holdouts will need 34% of a bond series to block the restructuring of that series. For larger distressed debt funds, this is achievable given the large potential recoveries.

The second type of CAC appears in bonds Argentina issued after settling with holdouts in March 2016 (here). For two reasons, these CACs are more favorable to the government than the CACs in its 2005 and 2010 exchange bonds. First, these clauses also allow the government to conduct an aggregated, dual-limb vote, but the voting threshold is lower. The overall vote required across all affected series (in aggregate) is 66.67%, and the vote required for each individual series is a bare majority. Better still, the issuer can restructure under a so-called single-limb vote in which prospective holdouts cannot acquire a blocking position (50%) in a single bond series. Here, the restructuring goes forward and applies to all bonds if approved by more than 75% of the entire affected debt stock, without any requirement of approval by each series. The catch—which we discuss below—is that the restructuring must also satisfy a “uniformly applicable” standard. 

All else equal, then, it should be easier to restructure the 2016-18 bonds than the 2005 and 2010 bonds. Should we expect to see holdout specialists like Elliott and Aurelius cluster into the 2005 and 2010 bonds? And should those bonds be trading at a premium compared to bonds issued more recently?

Not necessarily. Holding out gets an investor nothing unless it can enforce its claims. It is true that, after Argentina’s last default, Elliott, Aurelius, and a few other funds managed to get paid, often quite handsomely. Their success was due in no small part to patience and clever strategy. But it also resulted from a series of legal blunders on the part of the Argentines. These include the government’s decision not to use exit consents in 2001-02, its failure to eliminate the pari passu vulnerability via a bondholder vote even though it had the requisite votes to do so, its enactment of the “Lock Law” in 2005, and Ms. Kirchner’s (mis)behavior vis-à-vis the U.S. federal judiciary. It shouldn’t be too hard for Argentina to avoid making similar missteps this time around. Plus, the Second Circuit has taken steps to limit the pari passu strategy, which is what finally won the day for investors in the last fight. This includes two decisions within the last few weeks in the BisonBee and Lucesco cases.

Back to Reprofiling and “Uniformly Applicable”

Earlier, we noted that one of the conditions for the using the single-limb voting method (i.e., the one requiring approval of >75% in principal amount of all affected bonds regardless of the vote in any particular series) was that the restructuring offer satisfy the “uniformly applicable” condition. This is a fairly new requirement, because the aggregated, single-limb voting method is itself new. So its meaning hasn’t been tested in the courts. One important question is whether the standard allows the government to give very different treatment to investors, in NPV terms. For example, an investor whose bond is about to mature suffers a much greater loss from, say, a 5-year maturity extension than an investor whose bond is ten years from maturity.

The “uniformly applicable” standard is satisfied if bondholders are “invited to exchange, convert or substitute their debt securities on the same terms for (x) the same new instruments or other consideration or (y) new instruments or other consideration from an identical menu of instruments or other consideration.” The plain text of this standard would seem to allow significant differences in treatment from an NPV perspective. That is, as long as investors get the same “new instruments or other consideration”—in our example, a 5-year maturity extension—the government has given them “uniformly applicable” treatment. But of course, this will make many investors unhappy. And conceivably the text permits a different interpretation. (Is my consideration really the same as yours if the government offers me only 50% of my claim while offering you 95%?) This difference in NPV treatment is a common feature of many debt restructurings. But the “uniformly applicable” standard is a new one and may inject a bit of uncertainty.


I agree that the plain text does seem to allow significant differences in treatment and I think there is a big uphill climb for investors given that, even if a lot of case law existed on the "uniformly applicable" standard, it would be extremely difficult for a court to set a rule on when the standard is met. I can imagine someone in finance or accounting being able to lay out a calculation that ensured uniform NPV (or at least a way to show that the menu of instruments satisfied the clause), but aside from courts adopting a highly technical standard (which they are often not eager to do), it seems like they would be flying a bit blind on the math. This suggests that it will be hard for an investor, however unhappy, to find much traction here unless there's a district court looking to find another pari passu.

As Mr. Fisher noted above, the difficulty the courts face is not insignificant in deciding how to treat short term versus long term maturities. I concur that the court would avoid trying to dive into a mathematical solution. If the courts are not likely to enforce separate treatment for different maturities then the only recourse for short term holders would be through the CAC voting. Either they could try to hold up the process (this depends entirely on their representation %) or they could seek concessions. Unless the % of short term holders is high enough to significantly impair the process then concessions are unlikely, but in the event short term holders can impede the process then how would terms be changed? Would they just seek an exchange which promised higher rates to compensate the time value of their money, or perhaps a conversion to a longer term payment? Is that granularity of a change for a subset of the total bond holders practical through the CAC voting system? And any concessions to short term holders would disfavor long term holders. If the courts don't hold the line for short term holders it seems that they would be out of luck entirely.

The 2005 and 2010 bonds have a potential for holdouts within each individual series due to the 50% voting threshold per series. Looking at the bond issuances, there are several series that are relatively small, thus making it easier for holdout creditors to obtain a blocking position. Once there is evidence of holdouts in the restructuring, fewer investors are likely to participate, making it harder to reach the necessary thresholds even in larger series where it would be more challenging for a holdout to obtain a blocking position. As a result, we could see a failed restructuring of the 2005 and 2010 bonds. The domino effect created by the holdouts could prevent the 66.67% aggregated vote from being obtained.

I agree that the "uniformly applicable" standard would likely allow for different treatment of investors in NPV terms. However, I think that Argentina should be cautious about discriminating too heavily between groups of investors using this strategy. In this case, this would be between investors holding bonds maturing soon (who would be hurt the most in NPV terms) and those holding bonds maturing later (who would be hurt less than the former). It is not impossible to imagine a scenario where 25% or more of bondholders feel disadvantaged by an exchange and decide to hold out. While this does not make the exchange impossible, Argentina should consider this as a factor if it chooses to proceed under this single-limb approach.

I agree the formally identical but functionally different "uniformly applicable" standard would likely create a holdout of more than 25% bondholders with different maturity date than the rest. Unless the court is willing to read the text and interpret it as a formally different but functionally identical standard and allow NPV to play a role, CAC voting is the only conceivable method. However, the new Argentinian government should be cautious enough with this single-limb approach as it may have ripple effects on future loans in the international market.

I think Mr. Fisher is right in that courts would be "flying blind"on the math in terms of ensuring uniform NPV under the "uniformly applicable" standard. I disagree, however, that courts would be reluctant to adopt a technical standard. If the potential for recovery is high enough, I don't think it's unreasonable for an investor or group of investors to develop, in Mr. Fisher's words, "a calculation that ensured uniform NPV (or at least a way to show that the menu of instruments satisfied the clause)." In fact, I think the likelihood of courts adopting a technical standard only increases when they are presented with a readily applicable calculation or formula that fits the scenario at hand.

I agree with Mr. Fisher's point that defining when the "uniformly applicable" standard is met will be a difficult task for court, and I can see the merit of Mr. Proffitt's claim that courts may be more inclined to adopt a technical standard, when presented with a readily applicable one. However, I question whether a technical test is the appropriate way to set the "uniformly applicable" standard. I feel like it may be more sensible and feasible for the courts to adopt some kind of factor test.

I think "uniformly applicable" requirement can mean different things: you can say if the requirement is the same to everyone it is uniformly applicable to everyone; but you can also argue the effect of the requirement will lead to substantial different result. And I feel court would need to choose whether to take a facial discriminating treatment with substantial similar individual effect or a facial equally treatment with substantial different effect on each individual bondholder. But I think individual investor will prefer discriminating treatment, but facially discriminating may offend the intrinsic fairness sense of the judge.

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