Argentina files its latest brief against paying holdouts alongside its restructured debt today (Friday). That?s following this contretemps with Judge Griesa, and another difficult week for Argentine credit.
Whatever it says, you can be pretty sure it?ll have sharp words for Elliott Associates and the holdouts.
We?ll post when we get it. But first, why this ? and other briefs that should be coming ? matter so much?
After all, also filing briefs on Friday: actual holders of the restructured debt, and Bank of New York, which handles Argentina?s payments to them. The briefs could be in amicus form or as appellants coming to the case. There?s also the US government?s position to consider (it has previously filed amicus briefs).
This really could be the trial of the century for sovereign debt restructuring, if (and it is a big if ) further litigation ventures back into the weeds of the Second Circuit?s judgement last month. The policy implications are huge.
But then, if it does decide to weigh in, the US might still find further support for Argentina hard to stomach. Buenos Aires this week portrayed its courts as instruments of ?legal brutality? and continues to show total antipathy to paying anything at all to Elliott Associates. It?s no wonder Judge Griesa has already told Argentina to file an affidavit with its brief that it won?t try changing payment structures on the debt. (A pictorial guide to the payment ?snake? here, and third parties involved, via? Elliott. Click to enlarge)
So?
Why should these parties go on relying on Argentina to take the fight to the holdouts? It?s a little late in the case to do so, but why not do it themselves?
It has become that kind of case.
The Second District?s ruling that Argentina must pay the holdouts ? as per pari passu terms of their debt ? could transform the way sovereign bond contracts are written, and open broad swathes of the US banking and payments systems to possible challenge by future sovereign holdouts. Policy implications, as said.
Of course, right now though, the case is not really about reopening these big questions.
Judge Griesa?s hearing last week affected whether Argentina should get a stay on the order to pay through the month of December, when it pays out $3bn (a fair chunk) on pieces of restructured debt, while courts clarify what kind of payment to holdouts is due, and how third parties helping to make payments should be liable. As he said, ?the Court of Appeals further work is not going to say there is no money coming. It is a matter of how much.? Ultimately Judge Griesa extended the stay to December 1, the latest when that clarification will be made ? and one day before a payment on Argentina?s 2017 Global bonds is due.
Stay with us here?
In short, time is tight. Well perhaps not tight ? it?s quite possible the stay will be extended into December, as Vladimir Werning of JPMorgan has argued. But when the music does stop, there could be far fewer chairs for sovereign, bondholder and trustee bank to sit on.
So restructured holders are anxious, we know that.
But then, Judge Griesa?s hearing last Friday was the first time they?ve properly intervened in the case. It?s a little eleventh-hour. And as soon as they did stick their heads above the parapet, their argument ? that moves to end the stay mean they are being ?held hostage? ? was immediately machine-gunned down by Judge Griesa. ?Now if you want to get the exchange people paid, talk to the Republic. They can pay you,? he said.
But that?s the problem. When the Republic does talk, it?s either repeating itself or giving further ammunition to Elliott?s charges that it is preparing to evade US courts.
A case in point: Elliott?s own brief filed this week, which is ferocious as ever, and peppered with helpfully ominous statements by the Argentine government. But there?s also Argentina?s application back to the Second District this week ? for a rehearing en banc of last month?s judgement, possibly with a full 13-judge court in place of the original three-judge panel.
As Shearman & Sterling point out, petitions for a rehearing en banc generally don?t have a stellar success rate at getting accepted. This case might particularly fail to get reheard, Shearman add, because the three judges were unanimous, and because Argentina?s petition does seem to largely repeat arguments which the Second Circuit dealt with.
The petition says that the Second Circuit?s affirmations of the order to pay holdouts ?restrain the Republic from making scheduled interest payments ? outside the United States ? to the trustee for holders of its restructured debt.? But that?s not really the case: the court didn?t say anything about having to stop payments on the restructured holders in the first place. While the petition spits blood about Argentine sovereign assets being made fair game for seizure by holdouts ? ?A greater affront to sovereignty and sovereign immunity is hard to imagine? ? the court did not really say that, either. (It said that the orders to pay ?affect Argentina?s property only incidentally to the extent that the order prohibits Argentina from transferring money to some bondholders and not others.?)
But the uncertainty over the en banc process just means it will be more interesting to see how other parties briefing alongside Argentina, in the other (clarification) process, respond.
As JPMorgan?s Werning put it in a recent note about third-party briefs:
Other considerations are also likely to see the light, among them: the flaws in CACs as a mechanism to provide efficient cram-down process in sovereign restructurings, the adverse effect of pari passu on implicit IFI seniority, the fine line between the court injunctions and attachments that are banned under FSIA, the potential impact of injunctions on NY?s status as a financial center, and the prospect for the injunctions? implementation to promote more litigation?between bondholders and BoNY?(rather than putting an end to it).
It?s that last point which is particularly intriguing.
After all, if you go back to the payment structure for these restructured bonds, and how you could fit in holdout payments ? it?s complicated. In one sense it?s simple: Argentina always has to start the ball rolling and decide to pay holders whenever payment is due. As Judge Griesa intimated, that is in reality the point in the process where the restructured holders could be taken hostage, not later, when the cash bounces off Bank of New York?s Argentina operation and over to the US.
Then again, note this from Werning (who?s talking here about how Argentina could probably not immediately reroute bond payments out of the holdouts? grasp, if it comes to the crunch on the December 2 payment to the Global bonds):
First, a practical one: there is no time to successfully re-wire payments ahead of December coupons. Second, a political one: Argentina should be expected to act on the beliefs that provide the most convenient political justification of its actions. Argentina is sure to interpret that its obligations are extinguished de facto when funds reach the bondholder trustee, BoNY. (Irrespective of the fact that we believe that the registered holders? account must also be debited by BoNY for Argentina?s obligations to be extinguished de jure.)
If stays are extended this conviction has positive implications: Argentina will deposit funds, BoNY will transfer them. If stays are lifted this has negative implications: Argentina may deposit funds but leave any disconnect in the payment chain that arises thereafter to be resolved (rightly so or not) between bondholders and their trustee. We expect Argentina will request that stays be extended and the chances that it gets its way?at least through December?seem reasonable to us?
That?s the kind of tricky ? very tricky ? issue between third parties where we?d be interested to see if it comes up in the District Court with Judge Griesa, or in what he called ?the work to be done?, the rehearing by the Second Circuit. Elliott could well argue this is just not the courts? problem any more ? we can see that. But this is maybe one of the ways in which the pace of NML v Argentina, and thus the day of reckoning for a swathe of practice in sovereign debt restructuring, could be set by those third parties now.
And after all, restructured holders have already retained Boies, Schiller & Flexner, the firm of David Boies. (Boies litigated Bush v Gore versus Ted Olson. NML?s main lawyer is? Ted Olson).
That?s the kind of ding-dong you might bring before a full court. It would be a shame to leave all that legal firepower unused?
Related links:
Pari passu endgames ? Credit Slips
The CDS consequences ? Shearman
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