US courts shouldn’t play Hand of God in Argentina debt dispute

It is understandable if investors dislike Argentina, but President Kirchner is right to refuse to pay vulture funds holding defaulted Argentine debt more than what the sovereign paid bondholders in earlier restructurings. The US courts have given Argentina until the end of March to explain its proposals to make partial payments: these payments would be the fairest solution.

  • 05 Mar 2013
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Argentina horrified markets in April last year when it renationalised oil company YPF from Spanish firm Repsol. While shocking in isolation, the move was symptomatic of the increasingly hostile environment towards foreign investment that has resulted in dollars now being difficult to find anywhere in the country but the black market.

The sovereign is paying the price for its economic policy, having been unable to access international markets properly since its 2001 default.

Last October’s US District Court order — now under appeal — for Argentina to repay in full bondholders that did not accept the borrower’s 2005 and 2010 restructurings punished it further.

During the appeal process, Argentina’s president, Christine Kirchner, has said it might pay holdouts the same amount — but no more — that it paid to creditors who accepted the terms of the previous restructurings. On March 1, District Court judge Thomas Griesa gave Argentina the chance to explain exactly what it means by this, and has asked for a response by the end of March. Judge Griesa should realise that Kirchner’s offer is the fairest result.

The offer is an olive branch from Argentina, which passed a law after the debt exchanges that prevented it from paying any holders of its defaulted bonds that did not sign up to the debt exchange.

However, the NML Capital-led vulture funds — never has the description been so apt — chasing par payments on Argentina’s defaulted debt claim they are just seeking what is rightfully theirs.

The pari passu principle means that payments to bondholders that accepted haircuts in the 2005 and 2010 debt exchanges should be replicated to the holdouts that have not been paid since 2001, they say. Debate rages in the legal community over the correct interpretation of pari passu.

But beyond legal wrangling, October’s US ruling that Argentina should pay up in full was profoundly unfair. If the court does not repeal the ruling, it would be rewarding pure greed and going against a basic principle of the credit markets.

Risk and reward

The beauty of the capital markets is that they work on a basic principle of risk and reward. Investors buy high yield bonds knowing the risk of default is high, and are duly paid for good judgements. The higher the risk, the higher the reward; it’s hardly a labyrinthine formula from a Borges story.

NML and other funds bought debt that had already defaulted — about as risky as you can get. Furthermore, the US District Court’s ruling shows that these funds purchased some of the Argentine debt as late as June 2010 — by which time most bondholders had already taken a haircut.

Later in 2010 more than 90% of creditors had already agreed to haircuts of more than 70%. They had accepted that their decision to buy Argentine bonds before 2001 had been bad.

Why do NML et al think they are exempt from the consequences of their purchases? No market rules state that debt exchanged at 30 cents on the dollar should suddenly be worth par.

It was even written into Argentina’s 2005 and 2010 exchange prospectuses that the outstanding bonds were expected to remain in default indefinitely without being serviced.

“There can be no assurance that [holders of unexchanged bonds] will receive any future payments or be able to collect through litigation,” the prospectuses read.

Moral matters

If the bonds are pari passu as NML claims, the market states they are worth exactly the same as the exchanged bonds — just as Argentina suggests, and just as Judge Griesa should rule.

The hedge funds are not hard-done-by lenders being disproportionately punished, as they claim. The timing of their bond purchases shows that these were not credit-driven decisions but rather greedy bets that they could outwit a borrower’s legal team in the courts. This is a deliberate and concerted attempt to rinse a sovereign’s reserves; indeed this could have been the funds’ only intention when buying defaulted bonds, since no more payments were promised.

It is not positive for global credit markets if a sovereign issuer’s macroeconomic stability is so vulnerable to such avarice and self-interested aggression.

As the world’s financial centre, the US should not be defending the interests and greed of its own funds, but protecting a fair market that rewards responsible credit investing appropriately.

  • 05 Mar 2013

GlobalCapital European securitization league table

Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 Bank of America Merrill Lynch (BAML) 7,026 25 11.95
2 Citi 6,449 21 10.96
3 BNP Paribas 5,093 18 8.66
4 Barclays 4,040 11 6.87
5 Lloyds Bank 3,615 14 6.15

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Rank Lead Manager Amount $m No of issues Share %
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1 Citi 2,454.09 9 13.89%
2 JPMorgan 1,441.26 6 8.16%
3 SG Corporate & Investment Banking 1,292.64 1 7.32%
3 Rabobank 1,292.64 1 7.32%
5 Bank of America Merrill Lynch 1,226.20 5 6.94%