Sunday, February 10, 2013

Argentina and its Creditors – “We will not pay one dollar to the vulture funds.”

Argentina's dispute with its creditors is ongoing since its insolvency in 2001. It has been in the press recently because a US court has sentenced the country to pay its former creditors.

The basic facts are simple: Argentina had issued bonds. Following its insolvency in 2001, it agreed with most of its creditors to restructure these bonds and to replace them with new issues. The debtors who did not agree on the restructuring now claim payment of their bonds. The main argument is that they were promised by Argentina to be treated as any other bondholder (“pari passu”). Argentina would violate this promise if they now pay exclusively the holders of the new bonds.

In addition, plaintiffs argue that it is not inequitable to grant them 100 % of their initial claims, thereby not applying the haircuts accepted by other bondholders: “Those parties made a business judgment to accept assurances of prompt payment rather than being forced to litigate against the Republic around the world, as the plaintiffs have been forced to do at tremendous expense.”

A typical pari passu clause reads like this: “Each Obligor shall ensure that at all times any unsecured and unsubordinated claims of the Counterparty against it under the Finance Documents rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors except those creditors whose claims are mandatorily preferred by laws of general application to companies.”

You find such clause in almost any finance contract. In most jurisdictions, however, this would not be necessary: The law usually provides for a mandatory ranking of creditors. Only if you want to modify such ranking regarding participants in the a specific financing, this clause becomes actually relevant.

In orders dated December 7, 2011, February 23, 2012, and November 21, 2012, a US Court has approved the plaintiffs' argumentation. The court says that Argentina is bound by its contracts, as any other private person would be bound when it enters into a commercial transaction. In addition, the court specifies the pari passu obligation, saying that, when Argentina pays its new debtholders, it must pay the same fraction to the old debtholders. To give an example, if Argentina pays 5 % of the notional amount to its new creditors, it must also pay 5 % of the notional amount to its old creditors. The court calls this a “Ratable Payment”.

In the November 21, 2012 order, we can read: “It is obvious that a pari passu clause does not require that the debts in question be in the same amount or of the same nature. What is required is that the obligations under the various debts are complied with to the same extent, rather than having the obligations on the one debt honored and the obligations on the other debt repudiated, as has occurred in the present case. […] It is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After ten years of litigation this is a just result.”

What does Argentina respond to such argumentation? I haven't found very much when reading the case documents, besides some striking quotes:

We are never going to pay the “vulture funds. That's not going to change because of rulings. Those who think otherwise have not understood anything.” (Robert A. Cohen – Minister of Economy of Argentina)

Argentina will not reward loan sharks who bought defaulted bonds.” (Hernan Lorenzino – Minister of Economy of Argentina)

When I decided to read the case documents, I intended to learn more about pari passu and its application in bond indentures. From this perspective, my reading was rather disappointing.

You can find the full set of case documents here.