Argentina’s Quest for the Moral High Ground in the Recent Restructuring with Its Foreign Bondholders

By Steven T. Kargman (Kargman Associates/International Restructuring Advisors)

 

Steven T. Kargman

Argentina’s new government under President Alberto Fernández recently completed a bond exchange which was approved overwhelmingly by its foreign bondholders.  The final restructuring deal that Argentina reached with its foreign bondholders in early August was the product of a fraught and tortuous negotiating process that lasted several months and came after Argentina had defaulted on its sovereign debt in late May for the ninth time in its history.

A recent four-part article published in Global Restructuring Review examines the negotiating dynamics in the restructuring negotiations between Argentina and its foreign bondholders.  The article focuses in particular on what I call the “three P’s”—namely, the pandemic, the professoriate, and the Pope—that I argue underpinned Argentina’s strategy in those negotiations.

Argentina sought to use each of the “three P’s” to its advantage.  First, the pandemic likely made Argentina’s foreign creditors more accommodating in their stance vis-à-vis Argentina in light of the strains the pandemic placed on Argentina’s sovereign balance sheet.  Second, Argentina benefited from the support of prominent professors from around the world who expressed their strong support for Argentina’s negotiating position.  The professors weighed in on various matters such as whether Argentina’s debt sustainability would or would not be restored by debt restructuring proposals then under consideration and what type of collective action clauses (CACs) for binding dissenting creditors through a supermajority vote should be used in the new bonds issued pursuant to the restructuring.  Third, Argentina sought to benefit from the Pope’s moral authority as reflected in a meeting the Pope held in late January with President Fernández as well as in the Pope’s participation a few days later in a Vatican conference on issues of debt and development.

In its final section, the article discusses the economic prospects for Argentina post-restructuring in view of the major economic challenges that Argentina will continue to face notwithstanding the outcome of the recently concluded sovereign debt restructuring.  The article also provides an overview of certain factors that may be relevant to Argentina’s upcoming discussions with the International Monetary Fund (IMF) concerning the IMF’s outstanding loan of $44 billion to Argentina.

The full article can be found here. This four-part article was first published in Global Restructuring Review (GRR) and is reposted with the permission of the GRR.

Solving the Pari Passu Puzzle: The Market Still Knows Best

By Sergio J. Galvis (Sullivan & Cromwell LLP)

As a result of the Argentine sovereign debt crisis and ensuing holdout litigation saga, the pari passu (or ranking) clause became a source of great consternation in the international sovereign bond market. Specifically, Judge Griesa’s holding that Argentina had violated the pari passu clause by refusing to pay creditors who had not participated in the nation’s earlier debt exchanges, and the accompanying requirement that Argentina had to pay those holdout bondholders, led to uncertainty in the market regarding the leverage holdouts could exercise in sovereign debt restructurings going forward. Concern was expressed over the ability of sovereigns to succeed with voluntary exchange offers premised on the threat that the restructuring sovereign would default on payments due to non-participating bondholders. This article evaluates the impact of the court’s decision in the Argentine litigation to date, including subsequent court decisions that have helped reinforce the view that the equitable holding in favor of the holdouts in the Argentine saga is a narrowly prescribed outcome that is unlikely to be repeated absent extraordinary circumstances. It then examines the adoption of improved ranking clauses and collective action voting clauses in recent issuances of sovereign debt in the effort to bring greater certainty to market participants and facilitate efficient restructurings in the future without the need for extra-contractual restructuring mechanisms and remedies.

The full article is available here.


For other recent Roundtable posts related to sovereign debt, see Lubben, “Sovereign Bankruptcy Hydraulics“; Gulati and Rasmussen, “Puerto Rico and the Netherworld of Sovereign Debt Restructuring“; and a Cleary Gottlieb update on Puerto Rico’s bankruptcy.

Pari Passu Undone: Game-Changing Decisions for Sovereigns in Distress

By James Michael Blakemore (Cleary Gottlieb Steen & Hamilton LLP)

In “Pari Passu Undone: Game-Changing Decisions for Sovereigns in Distress,” which appears in Issue No. 3 of the “Cleary Gottlieb Emerging Markets Restructuring Journal,” published by Cleary Gottlieb Steen & Hamilton LLP,[1] Michael Lockman and I examine a recent decision in White Hawthorne, LLC v. Republic of Argentina, No. 16 Civ. 1042 (TPG), 2016 WL 7441699 (S.D.N.Y. Dec. 22, 2016), regarding the hotly litigated pari passu clause.

Following an economic catastrophe in the early 2000s, the Republic of Argentina successfully restructured the vast majority of its more than $80 billion of debt, exchanging new bonds for those on which the crisis had forced default. In February 2012, Judge Thomas P. Griesa of the Southern District of New York, based on a boilerplate provision in the defaulted bonds known as the pari passu clause, enjoined Argentina from servicing its restructured debt without simultaneously making ratable payments to holdout creditors who had refused to participate in the exchange. This interpretation was unprecedented and, given the pari passu clause’s ubiquity in sovereign debt instruments, threatened to reverberate far beyond the specific facts of Argentina’s case. For nearly five years, anxious sovereigns and market participants were left to ponder the scope of these rulings. Most basically, would a sovereign debtor’s decision to pay some but not all of its creditors, taken alone, violate the pari passu clause?

Judge Griesa has now answered this crucial question. Following Argentina’s announcement, in February 2016, of a global proposal to settle its defaulted debt, a group of hedge funds brought suit, arguing in part that Argentina’s settlement with other creditors violated the pari passu clause. In White Hawthorne, Judge Griesa disagreed. The Court’s opinion confirmed that, absent aggravating circumstances—Judge Griesa mentioned specifically the “incendiary statements” and “harmful legislation” of Argentina’s former government—a sovereign debtor may pay some of its creditors and not others without running afoul of the pari passu clause. The decision does much to clarify the limits of the pari passu clause and deals a serious blow to creditors who would interpret the clause broadly to undermine future sovereign restructuring efforts.

The full article is available here.


[1] The firm represented the Republic of Argentina in the matters described in the article. The views expressed here are solely those of the authors and do not necessarily reflect those of the firm or its clients.