October 1, 2014
Gov’t is mulling over default, debt swap
Forced by judicial ruling, Argentina could use opportunity to bring bonds to Buenos Aires
With the July 30 deadline of the grace period for Argentina to make a restructured bond repayment looming, the government could have a new debt swap in mind. On May 2, an alleged memo to the government leaked from Cleary Gottlieb Steen & Hamilton LLP, the law firm representing Argentina against the holdout hedge funds in New York, highlighted a forced default and then an immediate restructuring of all foreign bonds as “the best option” for President Cristina Fernández de Kirchner’s administration.“The best option for the Republic is to permit the Supreme Court to force a default and then immediately restructure all of their external bonds such that their payment mechanism and other related aspects stay outside the reach of the US courts,” Carmine Boccuzzi and two others were said to have written in the memo. A new debt swap would be the result of a selective default on Wednesday, but this label would be externally imposed by credit rating agencies, as the government will maintain that it fulfilled its duties by making a US$539 million deposit in a Bank of New York Mellon account in Buenos Aires.
Apprehensive over potential lawsuits both from the “vultures” and restructured bondholders, the government’s trustee has frozen the funds.
The technical solution the government could have in mind is gathering together the 85 percent collective action floor outlined in the bonds restructured in 2005 and 2010 and moving their jurisdiction to Buenos Aires, thus avoiding future interference by the US Judiciary.
The country could therefore keep paying its creditors, and await the expiration of the Rights Upon Future Offers (RUFO) clause on January 1, 2015, in order to finally resolve the issue of the holdouts’ US$1.33 billion plus accrued interest.
Back to the start
Economy Minister Axel Kicillof’s first measure following the decision of the Supreme Court to uphold Judge Thomas Griesa’s controversial pari passu ruling was to reopen the debt swap channel under Argentine law.
This and the letter sent by the government’s lawyers appears to indicate a gut reaction that is unlikely to have been ruled out.
Wednesday’s default would only apply to the US$539 million deposited by the government, leading credit rating agencies to implement the label of “selective default.” Only if a creditor holding at least 25 percent of a series of securities files for and is granted a “cross-default” would the entire restructurings of 2005 and 2010 collapse. This does not appear likely, because these 92.4 percent of bondholders have repeatedly shown that their priority is getting paid.
With this in mind, they would also be willing to remove their bonds from US jurisdiction and have them located in Buenos Aires. The question remains how the government would undertake this process.
Not so simple
There are two factors that make such a swap more difficult to those carried out in 2005 and 2010, one being the explicit anti-evasion order pronounced by Griesa and the other that Argentina doesn’t have a registry of who its creditors are.
In order to conduct a restructuring process, the identification of bondholders is pivotal, but registries are in the hands of the country’s trustees, that is, banks and law and brokerage firms, among others.
“Griesa issued anti-evasion orders in October and last week prohibiting brokerage firms, lawyers and banks from participating in a local swap, impeding the identification of creditors,” Eugenio Bruno, a laweyer for restructured creditors told the Herald.
Bruno added that attempting to do so would leave both the government and intermediary agents in contempt of court.
“Even if the majority of the country’s creditors are willing to do so, they will encounter legal complications,” he said, adding as an alternative that the government “could leave those bonds in New York without extinguishing them, and issue new ones in Buenos Aires.”
But that would “mean doubling the debt and it would be hard to hand them over to the real original creditors,” he warned.
Even Euroclear, a European trustee not directly reached by US jurisdiction, has hesitated and refrained from paying out Argentina’s creditors on the continent, concerned over going against the ruling, Marco Schnabl a New York-based lawyer at Skadden, Arps, Slate, Meagher & Flom told the Herald.
Most of the intermediary agents in question are affected by US jurisdiction, however, Schnabl added, citing the Depository Trust Company among such institutions.
“From our perspective, the anti-evasion law is clear: any measure aimed at evading court order is a violation. The amended injunction is clear: when Argentina pays the exchange bondholders, whether the current amount, accelerated or restructured, it must pay the litigants either before or simultaneously,” Puente investment banking company — which filed an amicus in favour of the government before the US Supreme Court before the case was settled — head strategist Alejo Costa told the Herald.
“A change to local jurisdiction would be complex and would put the country in violation of the court order,” he concluded.