Argentina has been locked in a long-running battle with a group of hedge funds led by Elliott Management and Aurelius Capital Management which are suing for full repayment of their defaulted bonds.
Group of hedge funds secured a significant victory in a federal appeals court on Friday in a case that is likely to have far-reaching effects on international bond markets, parts of the banking system and the struggling nation of Argentina.
The hedge funds, including one affiliated with the investment firm of the billionaire Paul E. Singer, bought a handful of bonds that Argentina’s government defaulted on early in the last decade. Their aim was to buy the debt for pennies on the dollar and then sue Argentina to press it to pay the bonds in full. A lower court judge ruled in their favor, and a three-judge panel of the United States Court of Appeals for the Second Circuit in New York upheld his decision.
Argentina lost its appeal of a ruling that would force it to pay in full holders of $1.5 billion in its defaulted debt when it makes a payment to investors who took discounted restructured bonds, leaving the unlikely prospect of a Supreme Court appeal as its last hope.
The U.S. Court of Appeals in New York said it would delay the effect of its ruling until the high court decides whether to review the case. Argentina’s restructured bonds fell after the ruling was released.
A three-judge appeals court panel, referring to the nation as “a uniquely recalcitrant debtor,” rejected Argentina’s arguments that a ruling in favor of the defaulted debt-holders, led by billionaire hedge fund manager Paul Singer’s Elliott Management Corp. and Aurelius Capital Management LP, would violate its sovereignty and expose it to a fresh financial crisis by threatening a default of the new bonds.
Argentina has vowed never to pay holders of its defaulted bonds, whom the country’s leaders have called “vultures,” and its legislature passed a law in 2005 barring payment of the defaulted bonds. Yesterday’s ruling leaves Argentina with the unlikely prospect of persuading the appeals court to overrule itself or the Supreme Court to consider the case.
Norma Madeo, spokeswoman for Argentina’s Economy Ministry, didn’t return a phone call seeking comment on the ruling.
“Today’s opinion unfortunately glosses over the inequitable impact of the injunction on the exchange bondholders’ constitutionally protected property rights,” Sean O’Shea, a lawyer for holders of the restructured bonds said yesterday in a statement. “We look forward to the opportunity to present the exchange bondholders’ position to the Supreme Court.”
Argentina in 2001 defaulted on a record $95 billion of foreign debt. Holders of about 91 percent of the bonds agreed to take new exchange bonds in 2005 and 2010, at a deep discount.
A group of holdout investors had asked the appeals court to uphold rulings by U.S. District Judge Thomas Griesa in Manhattan that they said give them the ability to collect the $1.5 billion they said they’re owed.
In ruling for the holdouts, the court yesterday rejected Argentina’s predictions of economic disaster.
“What the consequences predicted by Argentina have in common is that they are speculative, hyperbolic and almost entirely of the republic’s own making,” U.S. Circuit Judge Barrington Parker wrote in yesterday’s opinion.
Argentina’s restructured dollar bonds due in 2033 fell 1.64 cents to 59.66 cents on the dollar yesterday in New York after earlier rising to 62.03 cents, according to data compiled by Bloomberg. Yields on the securities climbed 0.41 percentage point to 15.07 percent. The extra yield investors demand to own Argentine bonds over U.S. Treasuries rose 0.49 percentage point to 10.72 points, according to JPMorgan Chase & Co. (JPM:US) data.
“I don’t think there’s any good news in this for Argentina,” said Bruce Wolfson, a lawyer with the firm Bingham McCutchen LLP who has been following the litigation. “The court apparently went down the line and affirmed all of Judge Griesa’s rulings.”
Wolfson said the odds are “very long” that the Supreme Court will agree to hear the case.
The court yesterday rejected Argentina’s arguments that a ruling against it would hamper future efforts by overwhelmed debtor nations to restructure their debt. Parker said Griesa was justified in tying payment of the defaulted bonds to the restructured debt payments because Argentina had made clear “its intention to defy any money judgment issued by this court.”
Yesterday’s ruling “appropriately condemns Argentina’s persistent violation of its obligations and its extraordinary defiance of the laws of the United States and the orders of U.S. courts,” Theodore Olson, a lawyer for Elliott, said in an e-mailed statement. “It confirms that Argentina is not above the law.”
Bank of New York Mellon Corp. (BK:US), the indenture trustee for Argentina’s restructured bonds, argued in the appeal that it shouldn’t be forced to halt payments to holders of the bonds if Argentina refuses to obey Griesa. The court yesterday agreed with Griesa’s ruling that BNY Mellon and other institutions involved in the restructured bond payments can’t act in concert with Argentina to violate his orders.
Argentina has spent the past decade opposing claims brought in U.S. courts by holders of the defaulted bonds.
The case was argued before the appeals court in February. The judges on the appeals panel were Rosemary Pooler, appointed by President Bill Clinton, a Democrat; Reena Raggi and Parker, both named to the court by George W. Bush, a Republican.
Many holders of the defaulted Argentina bonds have won U.S. court rulings requiring the country to pay them. Despite those rulings, courts have generally prevented them from moving to seize the country’s assets, citing the Foreign Sovereign Immunities Act.
The litigation could also create a situation in which Argentina, led by President Cristina Fernández de Kirchner, chooses to default on billions of dollars of bonds, a move that would deepen the country’s economic problems. Argentina has employed prominent New York lawyers to fight its case. Mrs. Kirchner has often commented combatively on the case, calling the hedge funds “vultures.”
“This is legal history in the making,” said Arturo C. Porzecanski, a professor of international economics at the American University in Washington. “The ruling, as well as the entire Argentina litigation, is really setting precedent.”
The appeals court decision has its roots in a dark period of Argentina’s recent history. Reeling from a harsh economic slowdown, Argentina defaulted on nearly $100 billion of debt in 2001. In the years afterward, many of the country’s bondholders agreed to deals in which they received new “exchange” bonds that were worth a lot less than the original ones. Argentina has kept up with the payments on the exchange bonds since it issued them.
But some investors, known as holdouts, refused to join the exchange deals and demanded full repayment. This included Mr. Singer’s firm, Elliott Management, which has sued other developing countries to make money on defaulted bonds. In the Argentina case, it even persuaded a court in Ghana to seize an Argentine naval vessel.
The funds demanded that they be paid in full on $1.3 billion of defaulted Argentine bonds, and Judge Thomas P. Griesa of Federal District Court in New York ruled forcefully in their favor.
His ruling contained two crucial features. First, he said Argentina had to pay the holdouts on their defaulted bonds whenever it next made payments on the restructured bonds. And in a move that has few precedents, Judge Griesa came up with a way to potentially enforce his decision if Argentina chose to ignore it. He singled out the financial firms that pass the payments on the restructured bonds from the Argentine government to their holders. If these firms handled the payments, they could effectively find themselves in contempt of the court’s ruling.
Not wanting to break the law, the firms, like Bank of New York Mellon, would stop processing the bond payments. Mrs. Kirchner would then have to decide whether to pay the holdouts to clear the way for the payment-processing firms to funnel money to the holders of the exchange bonds or, in the alternative, default on the exchange bonds.
Though the appeals court sided with Judge Griesa, it delayed the enforcement of the decision while the Supreme Court decides whether to take the case.
“Today’s unanimous, well-reasoned decision appropriately condemns Argentina’s persistent violation of its obligations and its extraordinary defiance of the laws of the United States,” Theodore B. Olson, a partner at Gibson, Dunn & Crutcher, the law firm that is representing an affiliate of Elliott Management, said in a statement.
“This is another opportunity for my government to do what it should do and deal in good faith,” said Horacio Vázquez, a Buenos Aires native who leads a group of bondholders who want to be repaid in full.
One big question is whether the appeals court decision will disrupt the sort of debt reductions that can ease the economic burdens of some countries. Investors might be emboldened to take a tough line after seeing Elliott’s legal successes.
But the appeals court argued that this Argentina case was narrow in nature, suggesting that it may not apply in other defaults. “This case is an exceptional one with little apparent bearing on transactions that can be expected in the future,” Judge Barrington D. Parker wrote in the decision.
Legal specialists who think the Argentina case won’t have a wide effect have also noted that many bonds now have a special feature that make it much harder for hedge funds to hold out.
Still, bonds continue to have a so-called pari passu clause, from the Latin for “on equal footing,” which has been crucial in this case. The clause provided the legal basis for the courts to demand that the holdouts be paid when the holders of the exchange bonds are paid.
“Everyone who has a clause like this had better look at it very carefully,” Mitu Gulati, a law professor at Duke, said.
Perhaps the most jarring development is that the appeals court upheld the provisions that are designed to stop banks from passing on payments on the exchange bonds. The government debt market lacks an authority, like a bankruptcy court, that can sort out disputes between creditors and debtors. By effectively tying the hands of firms like Bank of New York Mellon, the United States courts could become such an enforcer.
“This is the revolution in this case,” Mr. Gulati said. “For the first time in hundreds of years of sovereign debt, a court is saying, ‘We’re going to go out there and improve the market by helping you to enforce it.’ ”
The odds of Argentina getting the Supreme Court to rule on the case do not look strong.
“On the one hand, just looking at these questions as questions of law, I don’t think the Supreme Court is likely to take it up,” Henry Weisburg, a partner at Shearman & Sterling, said. “But you do have to balance this against the fact that sovereign states do get deference from the Supreme Court.”
In Argentina, Mrs. Kirchner is likely to keep up her strong opposition to the hedge funds for the foreseeable future, which means they probably won’t get paid in full any time soon.
But political analysts are starting to doubt whether she can win the 2015 election. That could pave the way for a new president who may be more willing to settle with the holdouts.