The Argentine 2020 Restructuring Drama: An Insider's Perspective

There has been much discussion of the recent (2020) Argentine restructuring on creditslips, including by Anna Gelpern (here) and Mark Weidemaier (here), two people who know more about these matters than pretty much anyone else anywhere. And significant portions of that discussion have been critical (or at least questioning) of the wisdom of two of the strategies that Argentina attempted to utilize during its recent restructuring: Pac Man and Re-designation. These criticisms also showed up in the financial press, in articles by Anna Szymanski (here) and Colby Smith (here), among others.

Yesterday, two of the key players on the Argentine restructuring team, Andres de la Cruz and Ignacio Lagos (both of Cleary Gottlieb) put out on ssrn a spirited defense of the Pac Man and Re-designation strategies. The article, “CACs at Work: What Next?” is available here (and should be forthcoming in the Capital Markets Law Journal soon). To cut to the chase, Andres and Ignacio argue that their strategies were misunderstood by commentators and, in the end, were actually embraced by investors.

The article is worth reading if you have any interest in sovereign debt (how could anyone not?), not only because it provides an insider’s guide to what happened during this highly controversial and drama-filled restructuring, but also because one of the authors, Andres de la Cruz, is one of the best sovereign debt lawyers in the business.

For prior pieces on this topic that take somewhat different perspectives, see here (Ian Clark and Dimitrios Lyratzakis) and here (my article with Lee Buchheit).

Here is the abstract:

In 2020, Argentina and Ecuador were the first sovereigns to conduct a debt restructuring using the cross series aggregation feature included in the International Capital Market’s standard Collective Action Clauses (ICMA CACs), published in 2014. The legal strategy of both countries articulated two features: (i) “re-designation” (ie, the possibility for the issuer, with bondholder consent, to re-define the pool of bond series to be considered for aggregation purposes); and (ii) the sequential use of the aggregation methods contemplated in the ICMA CACs (dubbed the “Pac-Man”). The combination of these two features in a sovereign debt workout could hypothetically result in a sovereign relying on a minority of its creditors to ultimately bind and restructure a majority. This new found flexibility initially led the creditor community to demand the eradication of the possibility to re-designate and the complete removal of the innovations introduced by ICMA in 2014 from Argentina’s bond documentation. Ultimately, Argentina and Ecuador persuaded their creditors to permit re-designation, as well as the sequential use of aggregation methods, and proposed adjusting the ICMA CACs by introducing certain limits that would foreclose the possibility for a sovereign to effect a restructuring over all creditors if its original offer failed to attract the support of a meaningful majority.

This article describes the terms and processes of the Argentine and Ecuadorian debt workouts and argues that (i) in certain cases, the downside of prohibiting a sovereign from “re-designating” outweighs the benefits of re-designation, as it may turn a restructuring into an “all-or-nothing” game, further complicating inter-creditor dynamics, and (ii) the ability to use different aggregation methods sequentially, within certain limits, also advances the objectives of the ICMA CACs.

One of my favorite bits is where the article seems to say (maybe not as explicitly as I’d like) that the contract provision that resulted in Argentina needing to utilize the re-designation strategy was the product of a drafting goof in the design of the 2014 New York version of Collective Action Clauses. Apparently, the English version did not contain the error though.

If that’s really the case, that’s huge. These clauses are not some historical relic whose meaning has been mangled by junior associates adding and subtracting words over the years (think: the pari passu drama). This is a brand spanking new clause that was brought out with great fanfare in 2014 by the International Capital Markets Association and the International Monetary Fund and the US Treasury and so on and so forth. Did it really have a drafting goof? (Mark and I talked to Anna about this a little on our podcast some months ago that was titled “How Did We Get the Crappy CAC?”, here).

The alternate hypothesis, of course, is that the drafting difference was intentional; that investors in the New York market wanted to constrain the ability of sovereigns to push through restructurings more than those in the English market.

One test of the goof hypothesis will be to see how the market reacts – are new bonds being issued with the goofy (goofed up?) 2014 version of the clause or the new version discussed in the article by Andres and Ignacio. I hear that Mongolia has issued with Argentine 2020 version of the clause (and maybe Suriname is considering this matter). It will be interesting to see what other issuers who issued in the wake of this controversy – since early 2020 -- have done though.

Another way to examine this question is to look at pricing differentials between bonds of similar risk that have different clauses (goofed and not goofed). Question is: Which version do investors value more?

Note: Ecuador also did a restructuring in 2020 where some of these same issues came up, but the deal that garnered all the glory and insults was of course the Argentine one.