What Can One Do With 50% plus One?

Today is the final day of my Duke-NYU sovereign debt seminar with Steve Choi and Lee Buchheit, and that makes me sad.  The students have delivered in spades this term, notwithstanding the disruptions to their lives as a result of corona drama. I can't begin to express how proud I am.  And teaching with Steve and Lee (with cameos by Ugo Panizza, Mark Weidemaier, Theresa Arnold, Anna Gelpern, Jeromin Zettelmeyer, Chanda De Long, Yannis Manuelides, Anna Szymanski, Felix Salmon, Jon Zonis, Robin Wigglesworth, and Colby Smith) has been special. I’m grateful for how much I've learned from them and the students.

In preparation for today’s final presentations, I want to note a couple of ideas from the student papers that arrived last night. These ideas struck me as both intriguing and audacious.  I haven’t thought them through adequately, but they got me thinking.  So, here goes. Some preliminary thoughts.

1. What Can I do With 50% Plus One?

The bane of any modern sovereign debt restructurer’s existence is the smart and well capitalized holdout creditor who acquires enough of a blocking stake to stop the use of CACs against it.  This problem is particularly salient in the old-style CACs without single-limb aggregation clauses.  Hence, our students focused on those bonds in their final papers. In Argentina’s case, these are the so-called Kirchner bonds issued in the exchange offers in 2005 and 2010.

Question is: What does one do if the holdouts have a 34% stake?  At first cut, that looks to undermine the possibility of using both the CACs and Exit Consents (in hindsight, a goof on the part of those who designed the CAC structure in the Kirchner bonds – but let us not dwell on that on the off chance that I might have had some input there).

The response is to scour the contract for things can be done by a simple majority.   Daniel, Francisco, Filippos and Chuck do just that in their “How to Restructure Argentine Debt” paper (here).  Intriguingly, they point to Section 4.11 of the Indenture, which says:

Subject to Section 4.11(c), the Holders of a Majority in aggregate principal amount Outstanding of the Debt Securities of any Series shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee . . .

So, what could one do with the power to direct the Trustee regarding the place of conducting the litigation proceedings?  Could one send the proceedings to the local court in Ulan Bator?  Probably not. But if – as many sovereign debt contracts do – the contract explicitly allows for suit to be brought, for example, in either Buenos Aires or New York, could the Trustee, if instructed by a majority of holders, instruct for the claims to be brought in Buenos Aires? (Section 12.8 is the relevant provision here).  Sounds like it.  The court there would apply New York law. But might an Argentine court applying New York law, for example, be more amenable to the Argentine government asserting a defense of Necessity during the coronavirus crisis than a New York judge? Hmmm . . . . I’m liking this better and better. After all, legal realists (i.e., Mark W) might point out that the real source of the local law advantage is not the governing law (contract law is basically the same everywhere), but the jurisdiction.  

(For more on the international law defense of Necessity from another group (“Necessity in the Time of Corona”), see here).

2. Reverse Acceleration Anyone?

Two other sets of students, Adriana and Luke (here), and Constantine (ssrn link to come soon, I hope), came up with another possible way of using the 50% plus one strategy as well (this time with Lebanon). And they found it in the reverse acceleration right that, in most sovereign bonds, sits with a simple majority of creditors. Initially, I had thought that this strategy had limited value since the contract provision seemed to say that a majority of creditors could reverse accelerate only after the underlying event that caused the Event of Default had been cured.  Adriana, Luke and Constantine, however, urged a more careful reading of the Lebanese FAA – which reveals that all that the majority has to do is to give notice to the issuer that the Event of Default has been cured. 

Question to ask then is whether the majority can give notice of the cure even when there has not been a cure.  Maybe so.  (This goes to a point that the guru of bond contract interpretation, Marcel Kahan of NYU, would sometimes make in his corporate bond class – about the difference between procedural and substantive contract rights).  Food for thought, methinks.  And it does lead directly to the question of whether there are inter creditor duties that apply in such a context (my good friends, Bratton and Levitin have some very relevant views (here)).