NML Capital NML Capital Limited, a Cayman Islands-based offshore unit of Paul Singer’s Elliott Management Corporation.
NML Capital NML Capital Limited, a Cayman Islands-based offshore unit of Paul Singer’s Elliott Management Corporation, purchased the majority of their holdings in 2008, paying an estimated USD49 million for one series of bonds whose face value was over USD220 million.
They in turn established the American Task Force Argentina lobbying group against Argentine bond restructuring efforts, and sued to attach Argentina’s ongoing payments to the bondholders who had participated in the earlier restructuring.
Read More Paul Singer- Elliot Management
During the 2000s, Paul Singer’s lawyers initially obtained several large judgments against Argentina (all of which were affirmed on appeal), but soon discovered that due to a number of sovereign immunity laws, it was impossible to actually enforce those judgments against the handful of Argentine assets still within the reach of U.S. jurisdiction.
They then reexamined their strategy and decided to attach Argentina’s ongoing payments to the bondholders who had participated in the 2005 and 2010 restructuring. The basis of this new strategy arose from a strategic error on Argentina’s part which was rooted in its history. Because Argentina was historically so unstable, it would have been difficult for it to solicit investors to buy bonds in Buenos Aires under Argentine jurisdiction, as few external investors trusted Argentina courts to enforce bonds against their own government.
This consideration led Argentina to transfer the issue of bonds to New York, under United States law, on April 20, 1976, as were most subsequent bond issues.
Bonds were thus under a special kind of bond contract, a “Fiscal Agency Agreement” which was drafted by its American attorneys under New York law. The FAA stipulated that the repayments on the bonds were to be made by Argentina through a trustee based in New York (meaning that the U.S. courts did have jurisdiction over that party to order injunctive relief).
In the Fiscal Agency Agreement, Argentina’s attorneys included a boilerplate pari passu clause, but neglected to include a collective action clause. As a result, Argentina could not force NML Capital or the other holdouts to participate in the 2005 or 2010 restructurings. Even worse, the pari passu clause was interpreted by U.S. courts as meaning that Argentina could either pay all its bondholders or none, but could not pay only those who cooperated with the 2005 restructuring and ignore the rest. This was considered to be fair by the U.S. courts because Argentina was bound by its attorneys’ actions; having enjoyed the benefit of New York law and access to New York capital markets, it now had to bear the burden.
As of February, 2013, after adverse decisions which would require full payment by Argentina, NML Capital’s claim remained before the United States Court of Appeals for the Second Circuit (New York). The decision of the appeals court favored NML and a motion for rehearing en banc was denied on March 26.
Large banks, investors, and the U.S. Treasury Department objected to the judge’s order, expressing concern over losses that would be incurred by bondholders and others, as well over disruption in the bond markets. Vladimir Werning, executive director for Latin American research at JPMorgan Chase, observed that vulture funds “are trying to block the payments system” in the U.S. itself, something “unprecedented in the New York jurisdiction.” Kevin Heine, a spokesman for Bank of New York Mellon, which handles bond payments, said the ruling “will create unrest in the credit markets and result in cascades of litigation, which is precisely the opposite effect that an injunction should have.” The American Bankers Association agreed, noting that “permitting injunctions that preclude pre-existing obligations whenever expedient to enforce a judgment against the debtor will have significantly adverse consequences for the financial system.” Argentina was given until March 29, 2013, to present a payment plan; but despite offering the holdouts significant returns (284% in the case of NML), the new repayment plan offered by Argentina was judged unlikely to be acceptable to the New York court. The payment formula proposed by the district court would imply a 1380% return for NML. On August 23, 2013, the United States Court of Appeals for the Second Circuit affirmed the lower court’s verdict and dismissed said plan. The ruling determined that holdouts should be repaid the full face value, and on highly unequal terms to the 93% who had accepted the 2005 and 2010 swaps at a 70%-75% discount.
A court in Germany has backed Argentina on the basis of the equal terms clause; and the ruling may be unenforceable, because the U.S. Justice Department does not want to create the precedent of overturning the Foreign Sovereign Immunities Act or forcing a default of 93% of the holders of a debt issue for the sake of ensuring the payment to holdouts. Argentina’s officials proposed placing the restructured bonds in question under Argentine law, while concurrently announcing a renewed bond swap offer.
The expiration of Rights Upon Future Offers in December 2014 will preclude bondholders from suing for better terms should the Argentine Government and the vulture funds settle, however, which makes such a settlement all the more likely after that date.
The United States Supreme Court on 7 October 2013 declined to hear a preliminary appeal filed by Argentina following the Second Circuit ruling, though this in effect maintained the stay against the adverse Griesa ruling due to related litigation in the lower courts until such time as the Griesa court can issue an attachment order; Argentine bonds rose on the news.
The possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives, can derail efforts for a cooperative restructuring, and may ultimately lead to the U.S. no longer being viewed as a safe place to issue sovereign debt. Alternate viewpoints abound, for example that Argentina is an “outlier in the history of sovereign restructuring”. It is likely to be of particular importance in cases in which the creditors are being asked to accept substantial debt and debt service reduction; however, it is unclear given the special circumstances of the Elliot/NML case whether it will be broadly applicable to holdouts in other restructuring.