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Argentina Beset By Pirates, Snakes

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Let's check in on Argentina. It's a lovable mess! You can read some background here or here or here. In brief:

  • Argentina had some Old Bonds, decided not to pay them (in 2005, more or less), got most of their holders to exchange into New Bonds at pennies on the dollar, started paying the New Bonds, stopped paying the Old Bonds, the usual.
  • Elliott Associates bought up lots of Old Bonds at pennies on the dollar, didn't exchange, travelled the earth suing and capturing warships and stuff.
  • Elliott won a big lawsuit against Argentina, getting a US district court and the Second Circuit to declare that Argentina couldn't make any interest payments on the New Bonds without ratably paying off the Old Bonds.
  • Argentina doesn't want to pay off the Old Bonds.
  • But it does want to keep paying the New Bonds.
  • The district court now has to, among other things, clarify its injunction saying that Argentina can't pay New Bonds without paying Old Bonds.
  • Specifically: how, if at all, will that injunction apply to various people in the "payment snake" - indenture trustee, securities depository, banks and brokers and whatnots - that snakes between Argentina, which has the money, and the New Bondholders, who want it?
  • Simplistically: Elliott thinks that anyone in the snake who takes money from Argentina and passes it on toward New Bondholders is "aiding and abetting" Argentina in violating the injunction. The snake members are more of the opinion that they're just a snake and can't be held responsible for what passes through them.

The head of the snake is Bank of New York Mellon, the indenture trustee on the New Bonds, who are in the unfortunate position of getting money from Argentina and dishing it out to New Bondholders. If the injunction applies to BoNY, then they will be in contempt of court if they do their job. They don't like this, and filed a brief last Friday saying why.1 They are not alone in this; various other bits of the snake and their caretakers - the New York Fed, DTC, the Clearing House Association, etc. - have expressed similar emotions.

But BoNY is perhaps most affected and no one wants to go to jail just for being an indenture trustee, so they are full of good arguments about how they are not working for Argentina, have no duties to it, really only met Argentina that one time, and all in all are just agents for the New Bondholders and so can't possibly be "aiding and abetting" Argentina or bound by the injunction. I find this pretty compelling actually!2 On the other hand, not binding anyone but Argentina to the injunction means in practice that Argentina can keep paying the New Bondholders while screwing the Old ones, since a US court can't really enjoin Argentina all that effectively.3 This is not that appealing, so there's some practical reason for the court to tell BoNY "tough luck, you're an extension of Argentina, and so you have to do what we told Argentina to do."

BoNY is well aware of that, because at some point its brief turns from a sympathetic and full-throated defense of its obligations to bondholders to … sort of the opposite. The shift starts innocently and metaphorically enough:

If the Court nevertheless concludes that BNY Mellon is bound by the Injunction and Argentina subsequently fails to make a Ratable Payment, BNY Mellon will face a potential conflict between its obligations to the Exchange Holders under the Indenture and its obligations to the Court. In that instance, BNY Mellon needs judicial guidance as to its duties and responsibilities. BNY Mellon should not be forced by Argentina’s independent violation of the Injunction to choose between exposing itself to the risk of contempt, on the one hand, or the risk of claims from Exchange Holders for breach of the Indenture, on the other. A path to avoid this conflict is charted by the Indenture, but BNY Mellon fears it cannot traverse it safely without judicial imprimatur.

But then it moves on to cite all the "wide range of exculpatory provisions" in the indenture, "which are designed to protect BNY Mellon from being exposed to liability." This is true. The list includes:

  • "BNY Mellon cannot be liable for any actions taken in good faith absent gross negligence";
  • "BNY Mellon is not required to expend, advance, or risk its own funds or otherwise incur personal financial liability in the performance of its duties"; and
  • BNY Mellon doesn't have to do anything "illegal or contrary to applicable law or regulation."

So BoNY asks that, if the court won't let it go about its business of paying New Bondholders, it at least make it clear that BoNY is off the hook:

Consistent with the foregoing, to the extent that the Court extends the Injunction to BNY Mellon, it should make clear that BNY Mellon is under no obligation under the Indenture or otherwise to expose itself to contempt sanctions by paying out any funds delivered by Argentina in the event that Argentina violates the Injunction.

BoNY lasted 15 pages before throwing the New Bondholders - y'know, the people it's supposed to be working for - under the bus. Under the ceremonial sail-powered warship is I guess the right metaphor here.

Anyway who can blame them? What's fun is to imagine what happens if BoNY loses and Argentina just keeps on paying the New Bonds as it used to, which I guess is the default expectation. What happens?

Meh, who knows. Elliott in its brief and reply brief on remand argue that the court should enjoin Argentina to pay ratably - so if it pays X% of the interest and principal due to the New Bondholders in December (when the next payment is due), it has to pay X% of the principal and interest due on the Old (defaulted, accelerated, due in full) Bonds. Some rough math: Argentina has about $3 billion of scheduled New Bond payments due in December, and about $8 billion of defaulted Old Bonds. So if there's $3 billion to be paid, it should by that formula go ~27% (~$800mm) to New Bonds and ~73% (~$2.2bn) to Old Bonds. That much is specific enough but Elliott gets a bit vague on the logical next step, which is that the court should just instruct BoNY to pay out 27% (or whatever) of any money it gets from Argentina to the New Bondholders, and give the rest to the court to hand to Elliott and friends. But I guess that is the answer? Thoughts?

Also open for thoughts: Of course we can't come this far without taking a quick peek at Section 4.5 of the Credit Derivatives Definitions:

"Failure to Pay" means, after the expiration of any applicable Grace Period (after the satisfaction of any conditions precedent to the commencement of such Grace Period), the failure by a Reference Entity to make, when and where due, any payments in an aggregate amount of not less than the Payment Requirement under one or more Obligations, in accordance with the terms of such Obligations at the time of such failure.

Any views on what happens if Argentina pays BoNY and BoNY, under the watchful eye of the U.S. District Court for the Southern District of New York, hands out three-quarters of the money to Elliott and a quarter to the bondholders? If BoNY is not part of the "Reference Entity" (Argentina) but just an agent of the New Bondholders, then BoNY getting the money and then handing it over to Elliott really shouldn't trigger CDS, should it? Argentina, after all, has not "failed to pay." The payment just got eaten by a snake. Though there's this:5

There is some question about whether there is a "failure to pay" if Argentina transfers funds to BoNY in Buenos Aires, but BoNY fails to pay the bondholders in New York. There is just barely enough fog in the indenture to give ISDA and its lawyers some room for interpretation (though the "received by Holders" language in the indenture cousels caution). The rumor mill has it that Elliott holds lots of CDS on Argentina; it is on the Determinations Committee charged with deciding whether there would be a credit event.

OH BOY am I looking forward to a contentious fight over whether Argentinian CDS is triggered next month. Others seem not to be. Here is Bloomberg today:4

Traders are reducing bets Argentina will default within a year on speculation that enforcement of a U.S. judge’s order to seize some bond payments will be delayed by a Bank of New York Mellon Corp. legal plea in the case. … The cost of credit-default swaps that insure against a default over the next year dropped for the first time in eight sessions on Nov. 19 and closed at 6,098 basis points yesterday, down from a record 7,455 on Nov. 16.

I guess? 61 points seems like a lot of confidence that the convolutions here will end up triggering CDS. But then, Elliott's done pretty well so far.

N.Y. Fed Backs Argentina in Case Involving Debt-Service Payments [DJ]
Argentine Sovereign Debt [Shearman & Sterling]
Joseph Cotterill on Argentina [FTAV]
Pari Passu Endgames [Credit Slips / Anna Gelpern]

1.That comes from this repository of all things Argentina at Shearman & Sterling, as does most of the next sentence.

2.Important: BUT WHAT DO I KNOW? I reason by analogy though: the court presumably wouldn't apply the injunction to the New Bondholders; i.e. if Argentina succeeded in getting their money to them the court wouldn't take it from them to give to the Old Bond holders. (I know this in part because Argentina has gotten them their money in the past, before this judgment, and nobody's trying to take it away from them.) So the question: when does the money pass from "Argentina and its extensions" to "bondholders and their extensions"? If it's in Argentina's treasury, or in the hands of their agents, then it's Argentina's and you can take it. If it's in the hands of the New Bondholders, or their agents (like, in their bank account, for instance), then you can't. If the indenture trustee is an agent of the New Bondholders, then you can't take it from the indenture trustee. That's a conceptually debatable question - the bondholders didn't like find and hire BoNY; Argentina did - but BoNY cites various legal-looking stuff to say that it's the bondholders' agent, not Argentina's. But, again: what do I know?

3.Since it's all the way over there in Argentina. Plus it has a navy, albeit a slightly reduced one.

4.Terminal-only so far I think?

5.There are others who seem more sanguine - Shearman & Sterling, for instance, think partial payment would clearly be a credit event, though they don't break down partial payment by Argentina vs. partial pass-through by BoNY. Also here is a take from JPMorgan about various re-routing-of-coupon options that might or might not trigger CDS.



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