London GDP-linked debt: Argentina awaits permission to appeal a US$1.5 bn ruling

The country is expecting a British court to decide whether it can appeal a case it lost to four hedge funds

Argentina will have to pay 1.33 billion euro (US$1.46 billion) to a group of hedge funds if the British Court of Appeal rules that the country cannot appeal a case related to GDP-linked bonds issued between 2005 and 2010. 

The appeals court is Argentina’s final recourse after British High Court Judge Simon Picken refused Argentina permission to appeal on June 9. That decision “pleased” the claimants in the case, according to Quinn Emanuel, from Quinn Emanuel Urquhart & Sullivan LLP, a law firm that acts for the investors.

The lawsuit was presented in 2019 by four hedge funds — Palladian Partners, HBK Master Fund, Hirsh Group, and Virtual Emerald International. They accused Argentina of changing how it calculated its GDP to avoid paying an extra sum for euro-denominated bonds under UK law, which were restructured in 2005 and depended on the country’s growth.

“The Judge rightly determined that the Republic’s grounds of appeal were weak and did not have any real chance of succeeding,” Quinn Emanuel told the Herald. Picken also rejected the claimant’s request that Argentina deposited in a trust account a quarter of the total sum ahead of the final ruling.

Three weeks after Picken’s rejection, on June 30, the Argentine government’s lawyers asked the Court of Appeal for permission to appeal  — its last chance to avoid having to pay. A decision is expected before the end of the year. So far, the country has presented some 660,000 pages of documents in the case, sources close to the matter told the Herald.

In total, the four funds that presented the case hold 48% of the disputed bonds, but Judge Picken determined that Argentina would have to pay all its creditors if it fails to get the ruling overturned on appeal — a situation that would put more pressure on the country’s international reserves, currently calculated to be at negative US$7.3 billion.

The case in bonds

In December 2001, as the country was convulsed by a political and economic crisis, Argentina’s then-President Adolfo Rodríguez Saá announced the suspension of sovereign debt payments. A few years later, in 2005, the Néstor Kirchner government summoned creditors to agree on new ways to repay the defaulted debt. 

During those negotiations, Argentina offered new securities with a haircut of about 70% of the principal. However, at the time, Argentina’s Economy Minister Roberto Lavagna and Finance Secretary Guillermo Nielsen offered creditors a “sweetening clause” that triggered the payment of a coupon if the country grew between 3% and 3.22%, depending on the year  — and if that growth wasn’t the result of a year-on-year rebound effect. The contract also established a US$20 billion cap for the total amount the coupons would pay — so far, Argentina has paid the creditors some US$10 billion in GDP-linked debt.

At the time, Argentina used data from a 1993 economic census to calculate its GDP. In 2014, at the request of the International Monetary Fund (IMF), Argentina changed the formula to calculate it with data from a 2004 economic census. The contract had a clause that contemplated the possibility of that change, which implied that Argentina would use a ratio between the two figures and apply it to all the amounts in pesos in the contract that would trigger the payment to adjust the percentages.

However, its wording could be interpreted in a way that that recalculation ratio should be applied once a year, thus forcing Argentina into measuring its GDP using both economic censuses and therefore having two separate indexes until the end of the bond’s lifetime in 2035.

With a ratio between the newly-calculated index and Argentina’s official projected growth estimates, which relied on old economic data, the funds calculated that a 1.26% increase in the GDP in 2013 would be enough to trigger the payment obligation, instead of the 3.22% the contract originally implied. That year, the official GDP growth figure was 2.92%. Judge Picken accepted that argument.

The funds had an alternative argument, which the judge dismissed: that Argentina had “acted in bad faith” and forged its GDP data in March 2014 to avoid paying.

The hedge funds also asked Argentina pay in advance at least a quarter of the total sum requested in the lawsuit ahead of the final ruling, equivalent to some US$375 million. However, Picken accepted the country’s argument that the advance payments would constitute “irreparable damage to the population” since Argentina cannot afford the payment and has not had access to international financial markets since 2018, when it resorted to the IMF after a debt crisis.

According to a report Argentina included in their petition, the sum the hedge funds are asking for is equivalent to 56% of the Potenciar Trabajo welfare program or 242% of the Progresar education scholarships.

Judge Picken also ruled creditors cannot seize Argentine assets abroad.

“However, the stay [on the advance payment] is only temporary,” Emanuel, the hedge funds’ lawyer, told the Herald. He added that the suspension will end automatically if the Court of Appeals refuses to let Argentina appeal, or grants permission but then dismisses the appeal itself.

“The Republic has enough money to pay the judgment sums if it wanted to,” he said. “The claimants are confident that the Republic’s attempts at appealing will fail because the Court of Appeals will agree with the High Court’s reading of the contractual terms.”

Argentina, on the other hand, is expecting the Court of Appeals to grant permission for the appeal, and preparing for a hearing that will likely take place in 2024.

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