November 23, 2014
US Supreme Court holdout ruling imminent
Understanding the basic issues behind the case that could lead to technical default
The US Supreme Court is positioned to open a new chapter in a multibillion-dollar dispute that has unsettled Argentina’s financial markets and raised questions about the rules for sovereign debt worldwide.
The court will say as soon as today whether it will review rulings that might force Argentina to make payments on billions of dollars in bonds the country repudiated in 2001. Argentina, which is battling investors led by billionaire Paul Singer’s NML Capital, says a courtroom defeat will probably trigger a new default.
NML is leading a group of investors who hold the defaulted bonds and have refused to accept the government’s offer of restructured debt worth about 30 cents on the dollar. The holdouts say an equal-treatment provision in their bond contract entitles them to full payment. Because the holdouts bought many of the bonds for less than full value, they stand to reap a windfall.
Below are answers to some central questions in the legal showdown.
Q: What is Argentina seeking in its appeal?
A: Argentina is challenging orders, issued by US District Judge Thomas Griesa, that require the country to pay the holdouts in full if it makes any payments to people who hold the restructured bonds.
The Supreme Court appeal challenges Griesa’s orders in two ways.
First, Argentina says Griesa and a federal appeals court have misinterpreted the equal-treatment provision in the bond agreement. One obstacle is that the provision is governed by state law — meaning New York’s state courts get the final say on what it means. Thus, Argentina is urging the Supreme Court to take the unusual step of asking New York’s highest court to say whether the country is in violation of the accord.
Argentina is also asking the Supreme Court to resolve a separate question: whether the orders violate a federal sovereign-immunity law by commandeering assets outside the US.
Q: What are the Supreme Court’s options?
A: The court has four choices:
(1) It could refuse to hear the appeal, leaving intact the lower court rulings and forcing Argentina to make a difficult choice that might involve paying the debt or defaulting.
(2) It could agree to hear Argentina’s arguments on sovereign immunity. Under its normal scheduling practices, the court would set an argument session for November or December and rule by June of next year.
(3) It could heed Argentina’s suggestion and ask the New York Court of Appeals to interpret the bond agreement. That would delay resolution for months and probably still leave the Supreme Court with the option of taking up the sovereign- immunity question.
(4) It could seek advice from US Solicitor General Donald Verrilli, the Obama administration’s top courtroom lawyer. The court often takes that step in cases affecting the federal government; the justices asked for Verrilli’s input before taking up the separate Argentina-bondholder case being decided this year. The administration backed Argentina at the lower court level, though that doesn’t guarantee government lawyers would urge Supreme Court review. Under this scenario, the Supreme Court probably wouldn’t say until the end of the year if it will grant review.
Q: What will Argentina do if the Supreme Court refuses to hear the case?
A: The most surprising response would be if Argentina actually writes a check. Most investors are envisaging a scenario that’s a bit bumpier.
In an appeals court hearing last year, Argentina’s attorneys said the country wouldn’t “voluntarily” obey the court orders. A clause in the restructured bond contracts restricts the nation from voluntarily offering the holdouts a better deal than the other bondholders receive. Some lawyers dispute whether Argentina is actually bound by this clause, which expires in December.
In the meantime, the concern is that Argentina will default, perhaps when its next coupon payment on US$13 billion is due June 30. According to a memo leaked to an Argentine website last month, the country’s attorneys recommend a default and immediate restructuring if the Supreme Court rejects the appeal.
In its latest Supreme Court brief, the country promised to comply with the orders, while saying the likely result would be a new default. Argentina says it doesn’t have the resources to pay what ultimately could amount to US$15 billion in holdout claims while also servicing the restructured bonds.
Q: Could Argentina use a default to get around Griesa’s orders and avoid paying the hedge funds in full?
A: Even in a default, Argentina would still have to treat all its creditors equally. To avoid that requirement, the country could try to restructure the bonds under Argentine law, though that would require finding firms willing to help it. Griesa has barred third parties from helping Argentina evade his orders. Argentina would have to find intermediaries that aren’t subject to US jurisdiction and are willing to take on the legal risk of defying Griesa.
Q: What impact is this having on the Argentine markets?
A: The case has whipsawed Argentine bond markets since NML’s surprising victory in the appeals court in October 2012.
The Argentine government has said it won’t offer NML better terms than it did in the past restructurings, so the market has speculated that a loss with the Supreme Court may lead to a default. That has pushed a lot of Argentine assets into the hands of hedge funds and distressed debt investors who say they’re prepared to ride out another default and restructuring.
Investors have been encouraged that the country may end up settling with NML after policy makers took steps to mend ties with international creditors including the International Monetary Fund and most recently, the Paris Club.
Q: What is this case doing in the US courts?
A: The country has defaulted seven times since gaining independence from Spain in 1816. Needing to reassure wary investors, the country agreed in its bond contacts that New York law would govern the provisions and any disputes would be adjudicated in New York courts.
The question is whether the US courts have gone too far in dictating Argentina’s sovereign debt practices. The answer ultimately may lie with the Supreme Court.
Q: When will the Supreme Court act?
A: The best bets are June 16, 23 or 30, when the court is scheduled to release lists of orders at 10:30am, Argentina time. The court’s term is scheduled to end in the final days of June. One way or another, the justices almost certainly will act by then.
Q: The Supreme Court is hearing another case about Argentina. What is that about and how does it affect this one?
A: The Supreme Court is preparing to decide whether two banks must turn over information about Argentina’s worldwide assets to NML, which is seeking to collect the US$1.6 billion it has won in US court cases. Although the legal issues in that case are unrelated to those in the bigger dispute, both sides will be scrutinizing the decision for any hints about the justices’ broader leanings.
With assistance from Bob Van Voris in federal court in Manhattan.