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Argentina submitted to the NY Court
of Appeals its alternative payment proposal for settling the claims
with holdout creditors in 'pari passu' litigation. The content of
Argentina's brief suggest that everyone could have been spared the
suspense and drama of waiting to read the filing around midnight on
the day of the deadline given by the Court.
Indeed, the proposal
could be characterized as a simple 'carbon copy' of the 2010
restructuring offer... if it were not for the fact that in this day
and age it is more fitting to label it as a 'copy/paste' of the
2010 restructuring offer.
One down, one more to
go
Our underweight
recommendation in Argentina credit has been predicated on the
conviction that, when challenged to a 'game of chicken' in NY
Courts, President Kirchner would not 'blink' (i.e. show compromise
and pay holdouts) and that in response, the Court will not be
threatened into 'blinking' either (i.e. to rule out of 'fear' in
favor of Argentina rather than on 'principle' in favor of
holdouts).
The first assumption
has been confirmed: Kirchner has been faithful to her promise that
holdouts would not be paid a penny more than restructured
bondholders - thus, trumping the Court's expectation that
"politicans change their mind all the time, don't they". Based on
this confirmation we believe that credit markets will view the
situation negatively - despite light positioning - and we keep our
underweight recommendation on external debt intact.
We must now await
confirmation regarding our second assumption. But we warn that
Argentina's filing has given the panel of NY judges very little
limited new information to work with ahead of their pending ruling.
We do not anticipate the Judges to support the 'cram down' being
requested by Argentina. We anticipate that the Court will to rule
against Argentina.
No PDI: Argentina is
not offering the needed FV for the Court nor NPV for the
holdouts
As early as page 2 of
its 22 page filing Argentina confirmed our assumption that it would
'stick to its guns' by defying the Court defined claims (principal
+ 'past due' interest) of $1.43 billion and instead drafting its
proposal along the lines of 'eligible claims' (only principal of
$449 million, see (*) below), consistent with the guidelines of the
2010 proposal.
In doing so, Argentina
is not offering the necessary face value (FV) for the Court to
sympathize with the proposal (**) nor the net present value (NPV)
for the holdouts to feel inclined to signal to the Court their
interest in considering the proposal. This constitutes a
'confrontational' strategy as it implies a petition for the Court
to 'cram down' holdouts into its 2010 restructuring.
In terms of specifics:
Argentina is offering holdout creditors a Discount bond for their
principal claims (with 'retroactive' interest to be paid in kind in
a Republic 17) and a GDP warrant (without retroactive payments).
Given the deal conforms strictly to the 2010 offer and does not
come with any 'sweeteners' nor provides any substantial variation
as suggested earlier this week by the local press we deem it is
worth some 48% of par claim today or, at most, 63% when valued at a
(lower) YTM pre-October 26 ruling. This contrasts with a
contractual par claim presented by holdouts of 334%.
Where to next: a
likely adverse ruling and then a petition for review to the Supreme
Court
We now expect the Court
to confirm our assumption that it will rule out of 'principal'
rather than 'fear' and thus, to affirm the District Court orders
(see: Argentina EMOS: A ruling based on 'principal' (... or fear?),
Mar 7).
While a ruling might
offer a surprise we are confident that our assumption that it will
not is solid. So far, all of our assumptions regarding the path
that 'pari passu' litigation would advance down this year have been
subsequently borne out by developments. Among other things, we
interpreted/anticipated that:
At this stage, if the
Court affirms the District Court orders as we expect, we would
anticipate Argentina to petition for a certiorari review from the
Supreme Court. This would extend the market anxiety until sometime
later this year when the Supreme Court responds whether it will
consider the case or not.
We expect that if
Argentina does not succeed in this endeavor it will attempt to
re-route payments on external debt bonds. This, however, is a
complicated affaire given the Court order (not stayed) that warns
intermediaries assisting Argentina in this process that they will
be in contempt of Court. True, one may interpret the
acknowledgement by holdout at the February 27 hearing that
bondholders are not themselves (as holders of property) impeded
from attempting to get their bonds paid elsewhere.
This might be seen
feasible to many observers if it is assumed that a vote to change
payment terms in the contract achieves a supra majority and crams
down all holders to accept the payment elsewhere. But we believe
that this may still face difficulties as long as the intermediaries
are affected by the order to not assist the process.
Are there any silver
linings?
In considering whether any
silver-linings can be pointed out we would not be very optimistic.
However, in the spirit of allowing investors to keep an open mind
and judge for themselves we present the following considerations as
final remarks:
Does
the Court harbor any questions about economic feasibility of
payment?
Argentina's brief
rehashed many of the arguments it has used in defending itself
before. One of the arguments used to justify the lack of
flexibility in proposing an unaltered 2010 payment scheme today was
that full payment would trigger litigation on some $43 billion debt
contracts ($28 billion restructured bondholders and $16 billion
untendered claims) - thus, rendering the District Court's payment
formula economically unfeasible.
In our view, at the Feb
27 hearing the Judges showed no sympathetic whatsoever to the idea
that the RUFO clause (included in Argentina's filing to support
part of that argument) in the new bonds was a legal constraint on
an offer by Argentina. Yet that still allows for litigation from
the other 'me toos' holding defaulted claims. Interestingly, at the
hearing one of the judges questioned whether the economic
feasibility of paying holdouts a 100% ratable payment had been
clearly established - suggesting partial receptiveness to these
concerns raised by Argentina. In its brief Argentina seeks to
exploit this doubt by accusing the District Court of having failed
to carry out due process when establishing this fact.
Are
judges indifferent to the distinction between 'past due' and
'retroactive' interest?
We do not think so. In
its brief Argentina attempts to salvage its proposal by arguing
that it should be interpreted as recognizing 'past due' interest.
What is being recognized, however, is what we would refer to as
"retroactive" interest, calculated at the (low) coupon rates of the
new bonds it proposes to deliver. This is not conventional
understanding of "past due" interest, calculated at (high) coupon
rates of the old bonds that holdouts claim. (see Argentina:
Preparing for the March 29 filing: The PDI 'swing factor' and
relevant NPVs (...and thoughts on the 'Ambito deal', Mar 27).
We understand that the
holdout's principal claim in default had a maturity date of 2005.
If so, parties might feel inclined to dispute whether it is
adequate to extrapolate the (higher) old bond coupons thereafter in
order to determine PDI claims, or alternatively, to do so using
some other (lower) coupon rate (for instance, that determined on
Argentina's restructured bonds).In fact, Argentina makes the point
that the purchase date of the defaulted securities in litigation
(2008) should be considered when computing PDI (rather than default
date, 2001). But this applies to some plaintiffs, not all.
Furthermore, we understand that the full Court claim (principal +
PDI) was not disputed in the District Court by Argentina and
therefore we fear it may be too late now for Argentina to push this
issue with the Appeals Court.
Challenges to the
notion of ratable payments as equitable treatment?
Another argument
presented in Argentina's brief suggests that the District Court's
formula does not provide for equitable treatment. Argentina argues
that enforcing a ratable payment along the lines of the District
Court to remedy a breach of 'pari passu' is not equitable given
that holdouts purchased their debt at a discount to face value and
would therefore would be in condition to achieve outsized profits
on their investment (which Argentina estimates at 1380%). We do not
think that this argument, however attractive it may be to the
layman, has much chance of being embraced by the
Judges.
True, the Appeals Court
did state in its October 26 ruling that it was not certain how to
compute the ratable payment formula and, in doing so, it may have
suggested that it does not share the simple interpretation of the
District Court that a payment formula is equitable. However,
Argentina's proposal does not seem to give the Court a feasible
alternative formulation because of how far it deviates from
contractual law interpretation and therefore the broad flexibility
it requires from the Court to uphold it. Can the Court take the
initiative and establish a different middle ground that it sees as
better representing equity? We do not know but think it is highly
unlikely.
Can
EUR bondholders be spared?
In its ruling the Court
will have to decide whether it excludes EUR bondholders under UK
law from the injunctions and only affects USD bondholder under NY
law. We believe that the jurisdiction of the indenture trustee
which both bondholder groups share gives the Court capacity to
enforce its orders broadly. Yet the jurisdiction of EUR bondholders
contracts allows the latter to maintain a glimmer of hope of being
spared from the orders. If that is to happen, we would expect it to
instead reflect the Court's potential interest in exploring ways to
mitigate negative consequences of the orders without undermining
their enforcement rather than reflecting the strict interpretation
of legal technicalities.
Can
stays be extended unconditionally?
In seeking approval for
certiorari, Argentina will have to petition for a further extension
of stays on the Court orders. There is lingering risk that such an
extension is granted on a conditional basis (i.e. that Argentina
deposit $1.43 billion in escrow) as was the case initially at the
District Court level. The fact that the Appeals Court subsequently
reversed that conditionality suggests that Argentina may be able to
repeat its (unconditional) extension of stays.
* Quantitatively, the
$449 million definition for principal claim use by Argentina is
slightly higher than the assumption of $428 million principal claim
reflected in the EBG filing. But qualitatively this difference it
is not relevant to the analysis..
** For retail investor
claims Argentina is offering a Par bond instead of a Discount bond
(with 'retroactive' interest on the new security paid in cash,
instead of the PIK bond - Republic 17 - of the Discount package) as
well as the GDP warrant (without 'retroactive' payments). However,
the key factor - 'past due' interest of $1 billion on the old
securities - is not recognized in either the Discount or the Par
bond options. While the NPV of the Par bond option is higher than
that of the Discount bond option it is only a distraction to
discuss it since it remains significantly below the 334% claim held
by holdouts.
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