Thursday, June 19, 2014

Argentina Upsets the Restructuring Model, Again



 Roy C. Smith
The Supreme Court’s refusal on June 16th to hear an appeal of lower court rulings upholding Argentina bond investors’ claims for payment has thrown a monkey wrench into sovereign debt restructuring, which for thirty years has been an important part of the international financial system.
The ruling, which entitles the hedge funds that bought defaulted Argentine debt to be paid full value, is actually a fairly narrow one. It applies only to Argentine debt issued under US law that was not exchanged in restructuring offers made by Argentina in 2005 and 2010. The lower courts held that under the “equal-treatment promise” inherent in US law, unexchanged “old” debt holders must be paid on their claims as long as “new” debt holders are being paid.
The hedge funds, which bought the bonds for pennies on the dollar at various times since 2001 have been very aggressive in pursuing their claims against Argentina. They have pursued activist strategies through litigation designed to force Argentina to buy back their bonds at a price approximating full value. Argentina’s president Christina Fernandez has repeatedly referred to them as “vultures,” and has insisted she will not pay “extortion” of as $15 billion in principal and accrued interest owed on the defaulted bonds. Since the Supreme Court’s decision, she will be forced to make payments on the held-back bonds if Argentina is to continue to pay on the rest of its debt.
Sovereign Immunity is Thrown Out
The ruling upset Argentina’s (and much of the rest of the world’s) expectation that the long-held notion of “sovereign immunity” would be upheld.
The highlights the difference between two classes of sovereign debt – those issued under local government laws with unquestioned sovereign immunity, and those issued under laws of established international financial jurisdictions such as the US and the UK, in which sovereign immunity had been presumed but not really tested.
Government debt issued under local laws is as sovereign as it can be – sovereign states are above the law. There is no bankruptcy law that applies to sovereigns, so creditors are stuck (as they have been since the Middle Ages) when they default and must accept whatever the sovereign offers in its effort to “restructure” the debt.
However, sovereign debt issued under US law, the Supreme Court has made clear, is hardly sovereign at all.  Creditors are entitled to the equal-treatment provision and may seek to discover and impound overseas assets of the defaulting government.
The Market Evolves
Prior to the 1980s, there was no market for bonds of Emerging Market countries because so many had defaulted in the 1930s and it took more than a decade to work out investors’ claims.
In the 1980s, many Emerging Market countries borrowed “petrodollars” from banks. This was money deposited in the banks by oil exporting countries after the four-fold price increase imposed in 1973. The price rise led to a world economic slowdown, and a shortage of foreign exchange that these countries needed to import oil. The banks, needing to lend out the petrodollars, offered Emerging Market governments dollar loans subject to US law. The countries, however, did not manage their finances well, and a decade later many of them defaulted.
During the 1980s, thanks to a plan designed by the US Treasury Department, banks could exchange their defaulted loans for new bonds issued by the countries that were collateralized by long-term zero-coupon US Treasury bonds. Because interest did not have to be paid until maturity, the bonds could be acquired at a very steep discount. The new collateralized bonds (called Brady Bonds after US Treasury secretary Nicholas Brady) were issued in exchange for the old loans, at a “haircut” (discount) of about 30% of the face value of the defaulted bonds. $70 of new bonds would be offered to replace $100 of old loans. The banks had already written the loans down to about that level.
As a relatively small group of international banks (not a bunch of hedge funds) were the loan holders, there were few holdouts that did not accept the terms of the exchange, though there were some. The countries were able to reduce the old debt on their books by 30%, to end their defaults and renew their access to markets. The new bonds traded actively and several went to premiums. Henceforth, market prices would reflect the economic conditions of the country, reflecting a probability of default.
After this, the market for Emerging Market sovereign debt expanded rapidly, and provided access to financing sources for dozens of countries they were quick to utilize.
After Brady Bonds
There were a number of defaults or near-defaults along the way that resulted in restructuring operations, in which the governments involved would offer new bonds to replace old ones. There was always a haircut in the process of between 30% and 40% depending on the market price of the old bonds at the time.
The exchange offers were always conditional on a minimum percentage of the old bonds being tendered for exchange. As most investors estimated the market value of the new bonds to be somewhat greater than the market value of the old, most were happy to participate in the exchange.
The net result was that exchange offers could reset a sovereign’s credit position, from bad to better, over a relatively short time period that would enable countries to regain access the markets quickly. The terms of the exchange would depend on negotiations between creditors and the governments, often with IMF oversight and endorsement. These would require some improvement in the economic and financial management practices of the countries. It wasn’t the same as a bankruptcy proceeding, but it had a similar effect. 
But some hedge funds thought they could do better by buying old bonds, often at discounts from their market prices, and not exchange them – in the hopes that they could negotiate quietly with the government to buy back the old bonds at a profit. This process might involve a few years of waiting, with no return on the bonds in the meantime, and some additional cost in litigation expense, but it they made enough nuisance they could expect to be bought out sooner or later. Many were.
Argentina Upsets the Norms
Argentina, however, upset things when in defaulted in 2001 on $90 billion of foreign debt, requiring the world’s largest restructuring. Argentina did not follow standard procedures of negotiating with creditors with IMF assistance. In 2004, it took a much more aggressive position, offering a 70% discount. It refused to accept a “traditional” discount of 30%; it wanted to maximize debt reduction in the exchange, which meant a much larger discount. The creditor committee, backed by the IMF, was furious but the market price of the outstanding old debt was about 30 percent of face value, justifying Argentina’s notion of a 70% haircut.
Seeing no better alternative, investors gave in; 75% of the bonds were tendered and the deal went through. There were a few hedge fund holdouts that figured that they could pressure the government into buying them out at a profit.
In 2010, Argentina offered the holdouts a slightly better deal, but the funds rejected this offer too. Instead, they increased their legal harassments, commencing the suit that was declined for review by the Supreme Court and suing to impound Argentine assets abroad.
Then Greece
Also in 2010, the sovereign bond market’s attention had turned to Greece, a member of the EU and therefore not generally considered an Emerging Market country. It was, nonetheless, in great financial difficulty following the global financial crisis that began in 2008, and in 2012 it needed to restructure its $200 billion outstanding foreign debt then trading at 30 cents on the dollar. The debt was not in default, but was getting close.
The Eurozone countries had already provided some assistance to Greece, but more was needed. Some thought they would ultimately bail out the debt, but others thought German reluctance to do so would prevent it.  In time there was a compromise – Greece would restructure its debt and do a number of other things to improve its financial position, and the Germans would go along. The exchange offer involved new bonds supplemented by a note of the European Financial Stability Fund and that package was determined to have a net present value of 70% of face value (but the cash vale was more like 55%.
But the Greeks realized that even with the EFSF note, the exchange might not meet the 75% minimum exchange that was required, so the parliament enacted a law that added a retroactive “collective action clause” (CAC) to outstanding debt issued under Greek law. As an EU and Eurozone member country, Greece had been able to issue most of its debt under Greek law. A collective action clause provides that if a supermajority of the bonds held are voted in favor of some action affecting all the bonds, the majority may bind the minority to accept the action. Naturally investors do not like CACs, so most Emerging Market sovereign bonds don’t have them.
Doing this retroactively, of course, is contrary to the law just about everywhere, but in Greece, sovereign immunity would prevent contesting it. As a result, the exchange offer went through. Tellingly, the Greek government later bought out at 100% of par value a small portion of Greek debt issued under UK law rather than face a lawsuit in the UK similar to the ones that the hedge funds were pursuing against Argentina in the US.
Argentina in a Bind
The Supreme Court’s action puts Argentina in a bind. In order to continue paying principal and interest due on its previously restructured bonds, it must make similar payments on the old bonds, which Argentina claims would amount to $15 billion. It floated a scheme to force a conversion of restructured bonds (issued under US law) to new bonds issued under Argentine law, but doing so would not escape the US lower court rulings. Defying these would expose Argentina to having government assets held in the US and elsewhere being impounded.
For the Future
The significance of the Supreme Court’s action is that future Emerging Market sovereign debt restructurings have been made more difficult and expensive, and investors are now more aware of the difference between US and local law and will be reluctant to give up the added protection of US law which substantially limits sovereign immunity
It also should result in sovereigns insisting on including CACs in their loan agreements to be sure they can eliminate holdouts in any future restructuring. For now, anyway, while interest rates are low they should be able to do so as the market for high yield Emerging Market sovereign debt is hot. When markets are hot, investors agree to almost anything.


10 comments:

  1. Hello everyone, My name is Brian Amberg, I am from the New Jersey, United State, am here to testify of how i got my loan from Mr Harry Morgan { harry50loanfirm@gmail.com} after i applied Two times from various loan lenders who claimed to be lenders right here this forum,i thought their lending where real and i applied but they never gave me loan until a friend of mine introduce me to Mr Harry Morgan the C.E.O of Harry Morgan Loan Finances who promised to help me with a loan of my desire and he really did as he promised without any form of delay, I never thought there are still reliable loan lenders until i met Mr Harry Morgan, who really helped me with my loan and changed my life for the better. I don't know if you are in need of an urgent loan also, So feel free to contact Mr Harry Morgan on his email address: { harry50loanfirm@gmail.com}

    ReplyDelete
    Replies
    1. Hola todos,
      Mi nombre es Sr. Rugare Sim. ¿Vivo en Holanda y soy un hombre feliz hoy? y me dije a mí mismo que cualquier prestamista que me rescate a mí y a mi familia de nuestra mala situación, lo recomendaré a cualquier persona que esté buscando un préstamo, él me dio felicidad a mí y a mi familia, necesitaba un préstamo de € 300,000.00 para comenzar mi vida de nuevo ya que soy un padre soltero con 2 hijos Conocí a este prestamista de préstamos honesto y temeroso de Allah que me ayuda con un préstamo de € 300,000.00, es un hombre temeroso de Allah, si necesita un préstamo y le devolverá el préstamo, comuníquese con él y dígale que (Sr. Rugare Sim) lo remitirá a él. Póngase en contacto con el Sr. Mohamed Careen por correo electrónico: (arabloanfirmserves@gmail.com)


      FORMULARIO DE INFORMACIÓN DE SOLICITUD DE PRÉSTAMO
      Primer nombre......
      Segundo nombre.....
      2) Género: .........
      3) Cantidad de préstamo necesaria: .........
      4) Duración del préstamo: .........
      5) País: .........
      6) Domicilio: .........
      7) Número de móvil: .........
      8) Dirección de correo electrónico ..........
      9) Ingresos mensuales: .....................
      10) Ocupación: ...........................
      11) ¿Qué sitio conociste aquí .....................
      Gracias y un saludo.
      Correo electrónico arabloanfirmserves@gmail.com

      Delete
  2. Hello Everybody, My name is.Mrs.Juliet Quin. I live in Canada and i am a happy woman today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family, i was in need of a loan of $ 73,000.00 to start my life all over as i am a single mother with 3 kids I met this honest and GOD fearing man loan lender that help me with a loan of $ 73,000.00 Canada Dollar, he is a GOD fearing man, if you are in need of loan and you will pay back the loan please contact him tell him that is Mrs.Juliet Quin that refer you to him. Contact Dr Purva Pius via email: reply to email (urgentloan22@gmail.com)

    ReplyDelete

  3. GENUINE LOAN WITH 3% INTEREST RATE APPLY NOW.
    Are you in need of a Loan to pay off your debt and start a new life? You have come to the right place were you can get your loan at a very low interest rate. Interested people/company should please contact us via email for more details.Email jubrinunityfinancialloan@gmail.com

    ReplyDelete

  4. Attention,
    This is an online advertisement from a registered Government approved and Licensed lender that gives out loans of various kinds,e.g, Mortgage loan, Business loan, Car Loans to only serious and interested parties against a very low affordable interest rate of 3%. Apply for your loan now. If you are interested contact Via: Abdallah.afandi@financier.com
    Thanks,
    Mr Yinin.

    ReplyDelete
  5. Hello Everybody,
    My name is Mrs Sharon Sim. I live in Singapore and i am a happy woman today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family, i was in need of a loan of S$250,000.00 to start my life all over as i am a single mother with 3 kids I met this honest and GOD fearing man loan lender that help me with a loan of S$250,000.00 SG. Dollar, he is a GOD fearing man, if you are in need of loan and you will pay back the loan please contact him tell him that is Mrs Sharon, that refer you to him. contact Dr Purva Pius,via email:(urgentloan22@gmail.com) Thank you.

    BORROWERS APPLICATION DETAILS


    1. Name Of Applicant in Full:……..
    2. Telephone Numbers:……….
    3. Address and Location:…….
    4. Amount in request………..
    5. Repayment Period:………..
    6. Purpose Of Loan………….
    7. country…………………
    8. phone…………………..
    9. occupation………………
    10.age/sex…………………
    11.Monthly Income…………..
    12.Email……………..

    Regards.
    Managements
    Email Kindly Contact: urgentloan22@gmail.com

    ReplyDelete
  6. Hello Everybody, I live in Cuba and i am a happy woman today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family, i was in need of a loan of $20, 000.00 to start my life all over as i am a single mother with 3 kids I met this honest and GOD fearing man loan lender that help me with a loan of $20, 000.00 Dollar, he is a GOD fearing man, if you are in need of loan and you will pay back the loan please contact him tell him that is Mrs Ruth Walls, that refer you to him. contact via email:(infoloanfirm8@gmail.com) Thank you.

    ReplyDelete
  7. Are you in financial crisis, looking for money to start your own business or to pay your bills?
    GET YOUR BLANK ATM CREDIT CARD AT AFFORDABLE PRICE*
    We sell this cards to all our customers and interested buyers worldwide,Tho card has a daily withdrawal limit of $5000 and up to $50,000 spending limit in stores and unlimited on POS.
    **WHAT WE OFFER**
    *1)WESTERN UNION TRANSFERS/MONEY GRAM TRANSFER*
    *2)BANKS LOGINS*
    *3)BANKS TRANSFERS*
    *4)CRYPTO CURRENCY MINNING*
    *5)BUYING OF GIFT CARDS*,
    *6)LOADING OF ACCOUNTS*
    *7)WALMART TRANSFERS*
    *8)BITCOIN INVESTMENTS*
    *9)REMOVING OF NAME FROM DEBIT RECORD AND CRIMINAL RECORD*
    *10)BANK HACKING*
    email blankatmmasterusa@gmail.com
    you can also call or whatsapp us Contact us today for more enlightenment

    +1(539) 888-2243
    WE ARE REAL AND LEGIT...........2019 FUNDS/FORGET ABOUT GETTING A LOAN..

    IT HAS BEEN TESTED AND TRUSTED

    whatsapp only ===>>   +1(539) 888-2243

    ReplyDelete

  8. Hello, Do you want to join the illuminati and be rich ,famous and powerful? for the rest of your life ? Benefits given to new member who join the illuminati Brotherhood!!!
    into your bank account $50,000,000USD ......
    Weekly salary $600,000USD .........
    A car value at $400.000USD.......
    Award contract worth $200,000,000USD.......
    A House in any country of your own choice. And a free visa to your dream country.Total lifestyle changes?? if you are interested, WhatsApp Via: +2348147226753 ,OR Email us on: illuminatitemle666@gmail.com , so we can begin the joining process!!!

    ReplyDelete
  9. Testimony on how i finally join the illuminate after many scammers stole from me All thanks to Grand Illuminati Official for making who i am today, i pledge to remain loyal and humble to the illuminate. i was being stolen-from and really hearth broken untill i found light by contacting Illuminati Official, through a good friend of mine from abroad, and i didnt regret it. i'm not so greedy to keep this free opportunity to myself because Illuminati Official, and the hood as a whole will not be pleased with me. so i'll also urge you to join and End your poverty, hard life, brokeness and get famous today in the illuminate. you can contact Illuminati Official ,via whastapp: +2348119239306, or via email: illuminatiofficial466@gmail.com, Illuminati Official reply you asap and get you started on your journey to success

    ReplyDelete