LatinFinance - January/February 2013 - 27

Argentina sovereign debt

used for an active sovereign borrower
and reads as suggesting a prohibition on
paying one equal ranking creditor before
another.
Griesa ruled that if funds are paid
to investors that accepted the 2005 and
2010 restructurings and not to holdout
creditors, then the holdouts aren’t being
treated equally.
Argentina and the other parties are
therefore awaiting direction on the
nature of the payment that it would
make to holdouts based on the order,
specifically a clarification on a ratable
payment. The appellate court could
determine that Argentina must pay
holdouts 100% of what is owed the
restructured creditors, or they could
determine an alternate interpretation.
This could take the form of a
scheduled payment. Analysts suggest
that perhaps even a third re-opening
of the exchange to holdouts might be
sufficient. With more than 90% of the
defaulted debt accounted for in the first
two offers, it is not clear if this would
result in heavy participation, though it
could earn goodwill.
If the interpretation stands, the effects
on other borrowers would be unclear, but
they are certainly taking notice, given
that pari passu clauses are common in
corporate bonds and loans. The exchange
bondholders, bystanders in the process,
also stand to lose if Argentina is ordered
to pay.

A question of choice

If the court rules against Argentina,
the expectation is that the sovereign
would prepare an exchange offer to the
restructured holders. To continue paying
them, Argentina would need to get the
debt out of New York law, possibly by
exchanging it for local debt, though there
are other foreign options.
“Because of the existence of the local
Argentine market, and the ability to issue
in dollars in Argentina, they don’t have to
default if they don’t want to,” says Dave
Rolley, emerging market debt portfolio
manager at Loomis Sayles, speaking at an
EMTA event in December. “If they wish
to protect that capital for investors, they
have the tools to do that regardless of
what the courts in the US determine.”

Argentina had not indicated any
such plans publicly as of December. It
is prioritizing the appeals process and
hinting that an alternative that would
evade a New York judgment might
compromise their appeal. Spokespeople
from Argentina’s finance ministry and
from Cleary Gottlieb, the sovereign’s
counsel, did not respond to requests for
comment.
Shifting to a jurisdiction such as the
UK or Singapore is also an option, though
it is unclear how judges there would
interpret the clause.
“There is a lot of talk, and I don’t

“It’s not just a delay,
	 it’s a delay with some
	 optimism. The more
	 time they have, the
	 more time they have
	 to plan”
	 Siobhan Morden, Jefferies
think its frivolous talk, about moving as
many deals as possible to London,” says
Anna Gelpern, professor at American
University, and former attorney at the US
Treasury and Cleary Gottlieb. “However, I
am somewhat skeptical of that scenario.”
Gelpern says there would be many
factors that go into choice of forum and
interpretation of the pari passu clause is
just one. But it is unlikely that a decision
against Argentina would result in broad
contract changes, she says: in both the
case of borrowing in other jurisdictions or
changes to future contracts to prevent this
type of scenario, the additional borrowing
costs might not make it worthwhile for an
issuer.
The question also remains about the
fallout for the Bank of New York and
other intermediaries in the payment

chain. Some fear that a broad reading –
forcing them to stop or divert payments
– could scare away future business.
Involving these institutions in the
decision has far-reaching implications
for the payments system, in addition to
forcing Argentina to act.
However, a ruling on their
requirements could help Argentina,
if the court ruled that the banks that
act as conduits for debt payments are
immune. In this case, Argentina could
continue paying the restructured
creditors, even if the pari passu clause
held up.
“The main fallout is to the clearing
and custody agents and losing that
business to the UK,” says Morden.
The Bank of New York has objected
to the application of the injunctions
against it, arguing that its obligations as
a trustee “should be the beginning and
the end of its responsibilities.”
The US government also filed a
“friend of the court” brief backing
Argentina and questioning Griesa’s
interpretation of the pari passu
clause, arguing that it “runs counter
to longstanding US efforts to promote
orderly restructuring of sovereign debt.”
It also warned the ruling could
jeopardize the primacy of the dollar in
the bond market. “The decision could
encourage issuers to issue debt in nonUS currencies in order to avoid the US
payments system, causing a detrimental
effect on the systemic role of the US
dollar,” it said.
The exchange bonholder group –
including investors such as BlackRock,
Gramercy and AllianceBernstein has
also wieghed in, asking the court for
a clear definition of pari passu. The
American Bankers Association has filed
in support of BNY and its independence
as an intermediary.

Outcomes

Gelpern sees the most likely outcome
is the second circuit panel narrowing
the application of the judgment to a
minimum number of third parties, most
likely the Bank of New York.
The three months to prepare for
this may turn the odds in Argentina’s

January/February 2013

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1/9/13 11:21 AM
LatinFinance - January/February 2013

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