June 23, 2014 / 4:56 PM / 5 years ago

Argentina debt ruling upends restructuring norms

(This article first appeared in the June 21st edition of IFR, a Thomson Reuters publication)

* Uncertainties heightened over future sovereign workouts

* IMF backs new plan to reprofile debt

* Issuers could follow industry lobby guidelines

LONDON, June 23 (IFR) - Holdout creditors’ legal victory over Argentina looks set in the short term to complicate future sovereign debt restructurings but it may also prompt quicker implementation of long-proposed reforms to ease such stand-offs.

The US Supreme Court last week declined to hear Argentina’s last-ditch effort to overturn a ruling that - as a result of the bonds’ pari passu or equal ranking clause - the country must pay litigant holdouts in full when it next pays those who accepted 2005 and 2010 exchanges.

At the same time, the IMF had just completed a meeting outlining proposals to overhaul how it deals with sovereign debt problems, giving preliminary backing to a plan that in exceptional circumstances it might try to extend bond maturities of distressed sovereigns seeking its help.

“Given that the pari passu interpretation stands, creditors will have one more significant weapon in their arsenal against sovereigns who default. That is big, given creditors generally have very few weapons,” said Mitu Gulati, a law professor at Duke University.

One sovereign restructuring adviser agreed that the ruling will change the mindset of bondholders dealing with a sovereign default.

“In the past, long-term bondholders may have been happy to accept an offer if they saw the writing on the wall. Now they may be wary of looking stupid if they accept an exchange and holdouts get paid. This will make everyone pause,” he said.

Others are less convinced, however, pointing to significant developments since Argentina defaulted 12 years ago and the idiosyncratic nature of this particular case.

“The Court of Appeals in New York, in upholding the pari passu claim, said the decision was not to be taken as a precedent and that it was an exceptional case. The Supreme Court effectively decided that that was good enough for the market,” said Philip Wood, special counsel at law firm Allen & Overy.

Argentina’s par bond prices fell around five percentage points on the news but did not fall off a cliff, backing this view.

“This will cause some disruption. It leaves uncertainty out there. There is likely to be litigation over these points that will need to be resolved In future restructurings,” Wood said.


Issuers are also likely now to follow the guidelines of the International Capital Markets Association and insert additional wording to clarify pari passu clauses do not mean rateable payment, as the Argentina case concluded, but only equal ranking.

“No one will issue bonds with that clause as it stands,” said a second restructuring adviser. Some issuers have already adopted revised pari passu clauses. Greece, for instance, did so when it returned to the market last month (two years after its March 2012 restructuring) as did Ecuador last week.

ICMA has also been behind moves to persuade issuers and investors to accept aggregated collective action clauses in new issues that can bind (through a majority vote) all of a country’s bondholders if the terms of its bonds are changed, preventing holdouts from blocking moves.

When first introduced in 2003 after Argentina’s default, CACs only applied to individual bond issues. That meant some of Greece’s foreign law bonds were not exchanged when the country defaulted two years ago because votes among bondholders, under the CACs, did not attract enough support.

Greece inserted a clause retroactively across all its domestic issues in aggregate, which was backed by one simple vote. Since then all eurozone issues have had to include such aggregated CACs and now ICMA has suggested that other sovereign issuers should adopt them too.

After consultations, ICMA now wants to propose that future bond issues should include the options of CACs for each individual series as well as an aggregated CAC across all of a country’s series. It is not yet clear if this will cover both foreign and domestic law debt.

In addition, a borrower would at its discretion be allowed in critical situations to simply have one vote across all qualifying bonds - as Greece did with its domestic bonds - to effect a restructuring offer, without giving the option for individual bond issues to escape if the majority of all bondholders vote for the deal.

“Both Greece and Argentina have attracted holdouts and we could see them in future restructurings too,” said Leland Goss, managing director and general counsel at ICMA. “The solution is aggregated CACs.”


Since the beginning of 2013 eurozone issuers have had to include “two limb” CACs in their new bonds, which give investors a vote in each series and across all bonds with such a clause. Official sector bodies, including the IMF, would prefer the “single limb” approach.

The first adviser said long-term bondholders would also support a single aggregated vote as that would help prevent restructuring proposals being blocked, and an unwanted hard default. “Otherwise could bring down the whole show,” he said.

In addition to its reprofiling paper, the IMF is to publish a separate paper on the topic shortly. Nevertheless, the second adviser pointed out changing pari passu clauses and inserting aggregated CACs would not be an immediate solution.

“Existing bonds do not have this. It will take 10 years for these issues to bleed out and be retired,” he said. “That’s 10 years of potential problems and uncertainties.”

In the meantime, distressed sovereigns will rely on existing issue-by-issue CACs if they have them. Luckily, Grenada, which is currently in discussions with creditors, only has one set of bonds and they have CACs.

“This decision will change the dynamics with creditors,” said the first adviser. “Bond issues with CACs should be fine to carry out exchanges. But for bonds in New York law with no CACs, I’m not so sure. This injects lots of uncertainties into the whole practice.”

Reporting by Christopher Spink, IFR Markets; editing by Matthew Davies

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