Argentina’s gonna make him an offer he can refuse, part two | FT Alphaville

Argentina’s gonna make him an offer he can refuse, part two

Update (4 April) – The Second Circuit has ordered NML to respond to the Argentine proposal by April 22. Which is as expected but more time on the clock for the Republic.

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Continuing our look at Friday’s proposal from Argentina to the Second Circuit on paying holdouts affiliated with Elliott Associates.

3) GDP warrants — attack of the jealous exchange bondholders?

This is where it really gets interesting. Because its proposal to the judges is a “carbon copy” of the 2010 restructuring (as JPMorgan’s Vladimir Werning put it), Argentina is also promising to issue holdouts with the GDP warrants everyone else got.

The problem — especially for the Argentine argument that payments to restructured and holdout alike should be equal — is that the GDP warrants have been a license to print money for holders in the past few years. They have jumped in value as the economy bounced back. (It’s all been enough for Alfonso Prat-Gay to argue in a recent amicus brief that the warrants have become a “long-run financial burden” on the country.)

So, Argentina says holdouts shouldn’t get a slice of those past payments — even though, as with the PDI, it has so far been quite happy to recalculate their claims using the restructured bonds. This is apparently because you’re only supposed to get GDP warrant cash “contemporaneously with annual growth cycles”.

Though don’t worry if that argument leaves you befuddled. The real reason not to make the GDP warrants retroactive seems to be this:

In addition, such payments could provoke exchange bondholders to claim that Argentina breached the “Rights Upon Future Offers” (“RUFO”) clause to which Argentina agreed in both the 2005 and 2010 Exchange Offers… Although Argentina does not interpret or concede that this Proposal triggers that clause, it cannot rule out that exchange bondholders might file claims to receive similar payments. This is an important consideration for the Republic.

The RUFO clause!

We’ve mentioned it a few times. It definitely appears to have directed Argentina’s otherwise-unfathomable litigation strategy at key points in the saga, but this is (I think) the first time it’s popped up as an “important consideration”.

The clause provides that Argentina can’t voluntarily make a better offer to any of its creditors before December 31, 2014, unless it can give the restructured holders the same opportunity at the same time. Otherwise the door is open for investors to sue. This has fed the idea that the end of 2014 is a target date for the Argentine government, leaving it to buy time and generally procrastinate in US courts until it can get here.

The problem with this is that Argentina really does seem to have loopholes available to it for getting round the RUFO. The big one — which its lawyer practically lit in pink neon at an oral hearing in February — is that Argentina might be able to “involuntarily” give better terms if those terms come via order of a US court. (But it cannot “voluntarily obey”). What is also an “important consideration”, but not one mentioned by Argentina, is that it’s surely going to be pretty difficult to sue Argentina now if you are an exchange bondholder. The whole reason these investors took the restructuring was not to spend years litigating.

Still, whatever the merits, Argentina’s aim in bringing up the RUFO clause may be pretty simple. They just want the judges to spend time looking at it. Because that buys time.

4) What’s so equitable about the price at which you buy a bond? Quite a lot, if you believe the Argentine government. Somewhere in the middle of its 22 pages, it presents the Second Circuit with these two tables:

On one level, these tables are there to tell the judges what a “substantial” return NML would get paid, even under the Argentine proposal containing a roughly 66 per cent haircut to principal.

On another, the second table helps argue the case for not paying NML too substantial a return (one “exorbitant on its face”) because that will be unfair to the restructured holders who took their lumps first. But on another level below even that, Argentina is trying to direct the judges to consider something new altogether.

It’s the estimated price at which NML bought its defaulted bonds, $48.7m, which you can see in both charts. The estimate actually comes from cross-referencing bond market prices with purchase dates which NML has divulged in the past.

So, the first thing to note is that Argentina might be angling for the judges to remand the case back for this evidence to be nailed down — buying it time — although that’s assuming they even like the look of the argument it’s forming here. Here is that argument:

It is equitable to consider plaintiffs’ dates of purchase, because if the debt were performing, plaintiffs would have received debt service only from the point of purchase. Sophisticated market participants paid a depressed price for the bonds, but even that value was only paid, in NML’s case, in 2008 and not in 2001. This Proposal gives plaintiffs credit as if they had held the bonds continuously. Original holders, who are principally retail, can opt for the Par Option.

By contrast, the formula adopted by the district court would cause great harm to the exchange bondholders while giving plaintiffs a return that is exorbitant on its face, and even more so when one takes into account the estimated purchase price of the majority of plaintiffs’ debt…

Felix says this is Argentina trying to make a “law against making money in the markets”. Not quite. It looks more complicated than that. Even so the argument remains pretty desperate.

Once upon a time in the litigation of sovereign bonds, governments used to be able to try defending themselves with ye olde principle that you can’t sue over debt that you bought just to open a lawsuit over and gain profit therefrom. It’s called champerty. “Intent” to buy the debt to sue is key. Elliott know this very well, because in 1998 a US District Court threw out a claim they had against Peru after finding that this was their intent — only to get reversed by the Second Circuit later on, which said that filing suit wasn’t Elliott’s primary intent in snapping up Peruvian bonds at low prices. The “champerty defence” had bitten the dust. But not before sovereign debt holdouts’ whole business model had flashed before their eyes.

Which is a long way of saying that asking judges to consider the equitable effect of purchase prices reads a bit like bringing back the champerty defence in disguise. The argument is not about NML’s intent per se, though Argentina does say NML “has deliberately refrained from” getting a direct judgement on this debt. It’s more that the decision to buy at a distressed price and at a detached time (2008, mostly) should go into the court’s consideration of equity. We might have seen a version of this argument already, in the hoo-ha about whether Elliott has inequitably bought CDS on Argentina (this would give it a payout, if Argentina defaults as a way not to pay the holdouts).

The lawyer writing this letter for Argentina — Cleary Gottlieb’s Jonathan Blackman — has written on the champerty defence in the past, as it happens. (H/T Ramiro Lopez Larroy and Eugenio Bruno.) Meanwhile I can imagine the holdouts’ response: Argentina is warbling about the proper existence of a secondary market providing liquidity for distressed sovereign bonds — “a benefit to all the parties involved,” in the words of one of their lawyers.

That’s one way of looking at it. The other is just that Argentina knows it’s losing, and talking about purchase prices at least lets it play to the public gallery back home.

5) Argentina’s ability (willingness?) to pay

It was widely expected that Argentina would tell the court that it simply doesn’t have the resources to pay all the holdout claims in full and upfront, and hence the judges should go with restructuring the claims.

Curiously, Argentina exceeded expectations. It does come out and say that “the Republic’s Proposal is consistent with the Republic’s ability to pay” — but then it doesn’t give the court actual hard numbers on what “ability” means, in terms of balances of payments, central bank reserves or whatever else is relevant. It just complains that it never got the chance to tell courts this stuff before, and advises the judges to remand if they want more evidence. Once again, it looks like a way for it to buy time, but it’s also another way in which Argentina doesn’t seem to appreciate the last-chance nature of the judges’ order for clarification.

The Republic’s proposal looks pretty battered by this point. But it’s lastly important to observe how Argentina also came back to the court on a demand that really was not an afterthought:

…what assurances, if any, it can provide that the official government action necessary to implement its proposal will be taken, and the timetable for such action.

Argentina has responded that it will “take all steps necessary” to get the proposal voted into law, and that the executive “expects that the necessary legislation will be promptly enacted.” There is no detailed timetable. Just “promptly”. Nothing is said either about the workings of Argentina’s lock law, which prevents reopening any of the restructuring offers unless it is suspended. I’d imagine the judges wanted to know things like that about the Argentine commitment to pay out rather than “all steps necessary”.

6) So the court rejects this proposal and Argentina defaults now, right?

Maybe not. In this second part, we’ve at least seen ways in which Argentina could get the judges to buy it more time — by seeking new information or remanding on things that need clearing up. Unfortunately for Argentina, that is not the vibe the Second Circuit has been giving off lately or in the fact that the order behind this proposal was for clarification.

Time to start drafting the cert petition, then?