Last week ISDA, who are in charge of credit default swaps, circulated some proposed changes to CDS to account for all the Greek, Argentine, SNS, everything unpleasantness. This prompted me to try out my one journalistic technique – calling1 ISDA and asking them to send me a copy – but they declined, so we’ll just rely on this research note from JPMorgan’s Saul Doctor and Danny White. Here’s the gist:2
ISDA will publish a list of “Package Observable Bonds” (POBs) based on size, liquidity, maturity and governing law. The proposals suggest that there could be one domestic and one international law bond in each of the following silos – a) 1-3 years, b) 3-12 years, c) 12-30 years – based on a set of rules that determine the largest and most frequently traded bond in each silo. An initial POB will remain as such unless, prior to the Credit Event, it no longer meets the deliverability criteria, is called/matures, or is reduced below a threshold. New bonds would be added when a particular bucket is empty.
If a Credit Event occurs (Restructuring or other Credit Event) and a POB has been restructured into a package, then that package, in its entirety, will be deliverable into the auction. For example if a POB with a notional of $100m is written down by 50% and the remaining portion converted into 50 shares, then the 50 shares could be delivered against $100m of CDS. If there is more than one package on offer, then the one that has the highest subscribers will be chosen. All obligations meeting the deliverability criteria remain deliverable as long as they were issued prior to the Credit Event.
So lots of people have been calling for this for a long time – me least of all, but also real people like the Managed Funds Association and Darrell Duffie. But you get a sense from that summary of how it’s more complicated than dopes like me think. Read more »
Yesterday the Second Circuit held arguments in the Argentina sovereign debt case. This case is … I mean, you kind of had to be following along, but quick summary: back in the day Argentina defaulted on some old bonds, and exchanged most of them at a discount into new bonds, which it’s been making payments on. Elliott Management bought a bunch of old bonds, which Argentina has not been making payments on, and sued Argentina to make them pay the old bonds pari passu with the new ones. Elliott won in a lower court, and then sort of won on appeal, and then Argentina raised some mind-melting consequences in the lower court, and then Elliott won again anyway, and now it’s back up on appeal again, and the oral arguments were yesterday. Also there’s a boat.
It sounds like yesterday’s hearing was sort of a nightmare for Argentina, though the nice thing for Argentina is that, as a sovereign nation, they have the option of waking up:
“We are representing a government, and governments will not be told to do things that fundamentally violate their principles,” Jonathan Blackman, a lawyer for the deadbeat South American country, told a Manhattan US appeals court.
“So the answer is you will not obey any order but the one you propose?” Judge Reena Raggi asked.
“We would not voluntarily obey such an order,” replied Blackman — who later said Argentina would be no more likely to obey a US court than the US would be to obey an Iranian court.
If you get to choose whether or not to obey it, it’s not so much of an order. Read more »
Oh Argentina. Still a mess! Basically all the bad things happened on Wednesday: Judge Griesa ruled that (1) Argentina really can’t pay holders of its exchange bonds without also paying off Elliott Associates on its old, unhaircut, defaulted bonds, and (2) neither can anyone else, including such luminaries as Bank of New York (the indenture trustee) and DTC (the clearing system for the bonds). These things are good for Elliott Associates and bad for various other people; you can read about some of the badness here or here or elsewhere.
Here is a note from JPMorgan’s Vladimir Werning on what might happen next; my favorite outcome is this:
- Argentina deposits GDP [i.e., GDP warrants, the first thing that gets paid, but the same logic applies to actual bonds - ed.] by sending check to Cede,
- Argentina does not deposit money for holdouts in escrow
- Cede has property of funds on behalf of bond holders
- Cede does not transfer to DTC but its possession means Argentina has extinguished its obligation de Jure
- The funds for GDP sits idle in Cede – they cannot be attached by Court, but cannot be taken out by bond holders
- Holdouts claim Argentina has re-routed the payments and is not complying with injunction
- Argentina’s lawyers claim payment to Cede is contemplated in the indenture and does not constitute re-routing
In Cede option there is no dispute, obligations have been extinguished de jure, no default, technical or otherwise.
Cede, of course, being the DTC nominee that is the registered holders of all of Argentina’s bonds;1 Werning points out that, while the normal method of paying bondholders is by sending a check to BoNY to send to Cede, sending a check straight to Cede also fits the requirements of the indenture. And because Cede is the only holder of the bonds, if Argentina pays it, then it’s paid the bonds, and there’s no default, technical or otherwise, no triggering of CDS, and nothing bad has happened. Argentina-wise and bond-wise. Actual bond investors might disagree. Read more »
If you’re a certain kind of dork you will enjoy the hell out of the Argentinian pari passu clause decision out of the Second Circuit today; the opinion is here and here are good things to read from Anna Gelpern and Joseph Cotterrill. In 1994 Argentina issued bonds under New York law that said “The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness.” Then it exchanged those bonds into new unsecured and unsubordinated external bonds, at 25-29 cents on the dollar, in 2005 and 2010, promising holders that if they did not take the new haircut bonds then they’d never see a penny on the old bonds. Then Argentina went merrily on its way, making regular payments on the new bonds and not the old ones. A bunch of hedge funds, including mainly piratical Elliott Associates, bought the old bonds and sued to get them paid back.
If you’re a human and can read you would predict the result:
- Argentina was paying the new bonds,
- it wasn’t paying the old bonds,
- so it’s definitely treating the old bonds worse than the new bonds, payments-wise,
- so doesn’t that mean that “the payment obligations [on the old bonds don't] rank at least equally with” the new bonds?
And the answer is some sort of indeterminate quantum state. You can take the regular-human reading – bonds that you don’t pay, and explicitly say you’ll never pay, do seem to be getting screwed vis-à-vis bonds that you do pay – or you can take the legalistic reading, which is that never paying interest on a bond is not the same a ranking its interest payments lower. The old bonds and new bonds rank equally as to payment, it’s just that one of them is being paid and the other one isn’t. Simple!
Weirdly that latter theory has lots of support. From the opinion: Read more »
The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.
Last week, Côte d’Ivoire and its creditor committee reached an agreement on a restructuring of the African country’s defaulted Brady bonds. Your correspondent, at the risk of showing his age, admits his involvement in the birth of the Bradies back in 1998, at the crest of a wave of optimism about Africa. Abidjan, no longer a defaulter, proudly hosted the emerging markets lending community at African Development Bank annual meetings a few weeks later. Côte d’Ivoire’s payments lasted longer than the African boom, but still managed only three coupon payments before lapsing into default.
Read more »