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December 2, 2012 11:00 AM Subscribe
New Case Law in Sovereign Debt Restructuring...in Lego Form
Called the "Trial of the Century" in Sovereign Debt restructuring, it pits Elliott Partners and their CEO Paul Singer versus the Republic of Argentina as well as other Sovereign Debt investors who accepted the terms of the earlier debt restructurings. If the judges current decision withstands appeal it will dramatically change the mechanisms used to forcibly cram down owners of distressed sovereign debt.
NB: As part of the case Elliott seized a tall ship owned by the Argentine Navy.
Called the "Trial of the Century" in Sovereign Debt restructuring, it pits Elliott Partners and their CEO Paul Singer versus the Republic of Argentina as well as other Sovereign Debt investors who accepted the terms of the earlier debt restructurings. If the judges current decision withstands appeal it will dramatically change the mechanisms used to forcibly cram down owners of distressed sovereign debt.
NB: As part of the case Elliott seized a tall ship owned by the Argentine Navy.
But the Federal District Court overseeing this case through a decade of tiring litigation seems more focused on cramped legal interpretations and the morality of debt than on the wider consequences of its rulings. The judge in the matter even called Argentina’s actions “immoral” — whatever that means to hedge funds and to other investors in a world of finance where only numbers matter.So the Federal Courts are going to turn into something like the TSA for flights of global capital: morons with delusions of grandeur who make you want to avoid travelling to the US of A?
1) If you're going to use a visual aid to explain the bond markets, why the hell would you choose toys? Doesn't make sense.
Maybe he's trying to imply that the whole decision and the players involved are idiotic?
posted by ennui.bz at 11:32 AM on December 2, 2012 [1 favorite]
America has conveniently established a wide array of situations under which democracies may now "legitimately" assassinate foreign citizens over the last decades, Yowser.
posted by jeffburdges at 11:33 AM on December 2, 2012 [1 favorite]
posted by jeffburdges at 11:33 AM on December 2, 2012 [1 favorite]
Jesus...
Remember when the Republicans were trying to force the United States into default on our debt? In addition to, for the first time in our history, sullying the good faith and credit of the people of the United States, they were trying to make this happen.
Fuck those guys.
posted by Blasdelb at 11:53 AM on December 2, 2012 [4 favorites]
Remember when the Republicans were trying to force the United States into default on our debt? In addition to, for the first time in our history, sullying the good faith and credit of the people of the United States, they were trying to make this happen.
Fuck those guys.
posted by Blasdelb at 11:53 AM on December 2, 2012 [4 favorites]
Absolutely ridiculous and incomplete story. Argentina willingly agreed to issue its bonds subject to New York law and the jurisdiction of New York courts -- this jurisdiction and governing law weren't dreamed up or imposed by hedge funds.
Not surprisingly, holders of debt claims whose validity, and default thereupon, is not subject to serious dispute, have made claims in New York courts that are entirely conventional and proper under New York law.
The only thing that is surprising (to some, at least) is that New York courts have been willing to follow this to a logical conclusion.
One certainly can sympathize with the holders of restructured debt, who could be left in a lose-lose situation; they get paid only what the holders of the pre-exchange debt get paid, but on the sharply reduced face value they agreed to take.
Ultimately, this will be resolved (or at least, avoided in the future) by the adoption of a foreign sovereign chapter of the US Bankruptcy Code, which will permit an orderly restructuring of foreign debt governed under New York law, including exchanges that are binding on all bondholders if holders of two-thirds of bonds agree.
posted by MattD at 12:01 PM on December 2, 2012 [2 favorites]
Not surprisingly, holders of debt claims whose validity, and default thereupon, is not subject to serious dispute, have made claims in New York courts that are entirely conventional and proper under New York law.
The only thing that is surprising (to some, at least) is that New York courts have been willing to follow this to a logical conclusion.
One certainly can sympathize with the holders of restructured debt, who could be left in a lose-lose situation; they get paid only what the holders of the pre-exchange debt get paid, but on the sharply reduced face value they agreed to take.
Ultimately, this will be resolved (or at least, avoided in the future) by the adoption of a foreign sovereign chapter of the US Bankruptcy Code, which will permit an orderly restructuring of foreign debt governed under New York law, including exchanges that are binding on all bondholders if holders of two-thirds of bonds agree.
posted by MattD at 12:01 PM on December 2, 2012 [2 favorites]
There is an amusing movie plot idea here : Evil financier tries extorting money from defaulted foreign country. Mafia goons kidnap his daughter knowing his government will blame the foreign country. Goons flee with prize to said foreign country because it makes a natural safe place for the exchange. International incident ensues. His daughter falls for kidnapper turns against her father. etc. Any takers?
posted by jeffburdges at 12:01 PM on December 2, 2012
posted by jeffburdges at 12:01 PM on December 2, 2012
I don't even think you need to change the bankruptcy code - you just need to change the legalese to allow cramdowns/collective action clauses across an entire class of the capital structure.
(Sorry if you thought this was biased MattD. I'm pretty much in your court, so I veered away from anything too close to that line.)
posted by JPD at 12:06 PM on December 2, 2012
(Sorry if you thought this was biased MattD. I'm pretty much in your court, so I veered away from anything too close to that line.)
posted by JPD at 12:06 PM on December 2, 2012
Ultimately, this will be resolved (or at least, avoided in the future) by the adoption of a foreign sovereign chapter of the US Bankruptcy Code, which will permit an orderly restructuring of foreign debt governed under New York law, including exchanges that are binding on all bondholders if holders of two-thirds of bonds agree.
This is what Collective Action Clauses are for, isn't it? I've heard in the past that most sovereign bonds issued in London have CaCs but ones issued in NYC, Frankfurt or elsewhere typically don't. Is that for legal reasons to do with New York law?
I know there's been a lot of talk recently about the need for super-CaCs, would that prevent this sort of thing?
posted by atrazine at 12:26 PM on December 2, 2012
This is what Collective Action Clauses are for, isn't it? I've heard in the past that most sovereign bonds issued in London have CaCs but ones issued in NYC, Frankfurt or elsewhere typically don't. Is that for legal reasons to do with New York law?
I know there's been a lot of talk recently about the need for super-CaCs, would that prevent this sort of thing?
posted by atrazine at 12:26 PM on December 2, 2012
Ultimately, this will be resolved (or at least, avoided in the future) by the adoption of a foreign sovereign chapter of the US Bankruptcy Code, which will permit an orderly restructuring of foreign debt governed under New York law, including exchanges that are binding on all bondholders if holders of two-thirds of bonds agree.
The Foreign Sovereign Immunities Act of 1976 should be equivalent to that. If you can't attach property then the sort of legal action Elliot is trying should be a non-starter. The federal court should be telling Elliot et al to suck it on an issue where they are clearly trying to extort money over a settled restrucuring.
The problem is, as you said, that the decision makes restructuring sovereign debt subject to the US law impossible, if any party can demand equal payment (as equal legal status.) The decision hurts people who want to loan to sovereign states from the US rather than helps them. You shouldn't need new law on this issue, just judges who aren't senile ideologues.
posted by ennui.bz at 12:36 PM on December 2, 2012 [1 favorite]
The Foreign Sovereign Immunities Act of 1976 should be equivalent to that. If you can't attach property then the sort of legal action Elliot is trying should be a non-starter. The federal court should be telling Elliot et al to suck it on an issue where they are clearly trying to extort money over a settled restrucuring.
The problem is, as you said, that the decision makes restructuring sovereign debt subject to the US law impossible, if any party can demand equal payment (as equal legal status.) The decision hurts people who want to loan to sovereign states from the US rather than helps them. You shouldn't need new law on this issue, just judges who aren't senile ideologues.
posted by ennui.bz at 12:36 PM on December 2, 2012 [1 favorite]
The thing that is glossed over in the Legos/Knights in armor/Thomas/Power Rangers edition, which is all I looked at (which I guess answers billjings question, why would you choose toys--to bring it to the attention of those who otherwise don't care) is the initial defaulting of the bonds. Can Argentina, or any country, legally default and restructure their bonds? If so, then the people who refused the restructured bonds are out of luck. It looks like the judge is saying no, they can't restructure.
posted by eye of newt at 12:44 PM on December 2, 2012
posted by eye of newt at 12:44 PM on December 2, 2012
It wasn't a settled restructuring. As noted above, the bonds didn't have a collective action clause, which in New York law leaves only a state-law insolvency proceeding or a federal bankruptcy as legal means to deprive a non-exchanging creditor of their rights. JPD, I wonder if a foreign sovereign can commence a Chapter 11 (or Chapter 15 ancillary to a restructuring main proceeding abroad) -- maybe you don't need a new chapter?
Ennui, I disagree. A judgment on default and the question of remedies on default are separate issues. Common law (and certainly the cases and controversies clause in the Constitution when it comes to federal courts) would generally prohibit you from pursuing a default judgment when no possible remedy would be available ... but that's not the case. Elliot thinks they have a US remedy enforceable notwithstanding FSIA, and, in any event, FSIA can't keep non US plaintiffs (such as Elliot's offshore investment vehicles) from enforcing default judgments outside of the United States. FSIA might lack any extra-territoriality at all, which would permit even US entities to enforce against sovereign properties abroad.
posted by MattD at 12:52 PM on December 2, 2012
Ennui, I disagree. A judgment on default and the question of remedies on default are separate issues. Common law (and certainly the cases and controversies clause in the Constitution when it comes to federal courts) would generally prohibit you from pursuing a default judgment when no possible remedy would be available ... but that's not the case. Elliot thinks they have a US remedy enforceable notwithstanding FSIA, and, in any event, FSIA can't keep non US plaintiffs (such as Elliot's offshore investment vehicles) from enforcing default judgments outside of the United States. FSIA might lack any extra-territoriality at all, which would permit even US entities to enforce against sovereign properties abroad.
posted by MattD at 12:52 PM on December 2, 2012
I might be misremembering but I think Elliott's offshore entities actually pursued Argentina through the UK courts not the US courts. That's how they seized the boat. I don't think the US courts could actually grant them the right to seize property outside of the US. Not really sure. Not a lawyer, not a sovereign debt guy.
I thought that it was standard for sovereign issuers in the US to waive sovereign immunity as part of the terms of NY based issuances as well? That's part of how Bank of New York is actually the entity the court ordered to act? They can't actually compel Argentina to pay Elliott - the only thing the court can do is tell Bank of New York that any money Argentina deposits with them to pay the existing post-cramdown bondholders can't go to those bondholders but rather has to go to Elliot et al first.
The other fact I find very interesting is that no one knows what the event of default is. Argentina has a payment due on 12/15 for GDP linked warrants that were part of the original restructuring. No one is really sure if not paying those warrants is an event of default, or the event of default will be 12/31 when the next coupon payment is due.
posted by JPD at 1:08 PM on December 2, 2012
I thought that it was standard for sovereign issuers in the US to waive sovereign immunity as part of the terms of NY based issuances as well? That's part of how Bank of New York is actually the entity the court ordered to act? They can't actually compel Argentina to pay Elliott - the only thing the court can do is tell Bank of New York that any money Argentina deposits with them to pay the existing post-cramdown bondholders can't go to those bondholders but rather has to go to Elliot et al first.
The other fact I find very interesting is that no one knows what the event of default is. Argentina has a payment due on 12/15 for GDP linked warrants that were part of the original restructuring. No one is really sure if not paying those warrants is an event of default, or the event of default will be 12/31 when the next coupon payment is due.
posted by JPD at 1:08 PM on December 2, 2012
Reading the wikipedia on Foreign Sovereign Immunities Act, I'm not sure why it would apply. I would think the bonds would come under the commercial activity exception. Argentina argued the point in 1992 to the Supreme Court, who found in that case, which seems similar to this case, they didn't have sovereign immunity.
posted by rakish_yet_centered at 1:42 PM on December 2, 2012
posted by rakish_yet_centered at 1:42 PM on December 2, 2012
Oh, look, junk debt buyers are at it again. Fuck those guys.
posted by wierdo at 4:08 PM on December 2, 2012 [1 favorite]
posted by wierdo at 4:08 PM on December 2, 2012 [1 favorite]
Rich country uses law to transfer wealth from poor country to itself. I guess it is better than using military force, but it would be kind of better to just stop doing that.
posted by onya at 5:35 PM on December 2, 2012
posted by onya at 5:35 PM on December 2, 2012
Argentina might not be super wealthy, but it's not like it's a super poor country with a barely functional government either.
posted by atrazine at 7:17 PM on December 2, 2012
posted by atrazine at 7:17 PM on December 2, 2012
America has conveniently established a wide array of situations under which democracies may now "legitimately" assassinate foreign citizens over the last decades, Yowser.
I think "seizing" ships got your ass legitimately assassinated by the US marine corps as early as 1801.
posted by Kid Charlemagne at 10:02 PM on December 2, 2012
I think "seizing" ships got your ass legitimately assassinated by the US marine corps as early as 1801.
posted by Kid Charlemagne at 10:02 PM on December 2, 2012
One of the problems with Elliott Partners managing to push this through is that it then undermines any rational for lenders charging higher Interest Rates (Risk Premiums) for different sovereign borrowers.
If they can actually extranationally "legally" force countries to repay then what is the rational for a risk premium?
I"m also curious when these loans were originally given, and under what circumstances and what sort of interest rates are they paying on those? Who was involved in the negotiations?
Sure you can say "Argentina agreed to New York Law" but did they really have a choice at the time?
posted by mary8nne at 8:21 AM on December 3, 2012
If they can actually extranationally "legally" force countries to repay then what is the rational for a risk premium?
I"m also curious when these loans were originally given, and under what circumstances and what sort of interest rates are they paying on those? Who was involved in the negotiations?
Sure you can say "Argentina agreed to New York Law" but did they really have a choice at the time?
posted by mary8nne at 8:21 AM on December 3, 2012
Well they had a choice not to sell bonds in the US I guess. But given they wanted to sell USD denominated debt that would have been a little bit harder to pull off.
Also yes, you would still deserve a risk premium - because it took like 11 years of the bonds non-cashflowing for Elliott to win in court - and its still not clear they are going to win. To say this decision makes sovereign debt uniform seems odd. I'm not as worried about Germany defaulting and dragging me into court for ten years as I would be if I were buying Zambian debt.
posted by JPD at 8:37 AM on December 3, 2012
Also yes, you would still deserve a risk premium - because it took like 11 years of the bonds non-cashflowing for Elliott to win in court - and its still not clear they are going to win. To say this decision makes sovereign debt uniform seems odd. I'm not as worried about Germany defaulting and dragging me into court for ten years as I would be if I were buying Zambian debt.
posted by JPD at 8:37 AM on December 3, 2012
Also don't forget that in corporate bond defaults you force the defaulted debtor to give you their assets as well.
posted by JPD at 8:39 AM on December 3, 2012
posted by JPD at 8:39 AM on December 3, 2012
If you believe what the law professors who wrote the articles that are linked in this link of the post, the problem isn't with Argentina, but with the interpretation of pari passu. To the people who wrote the contract, the clause was a standard one, included in every contract, that had no precise meaning. Apparently every sovereign debt specialist out there thinks the court's interpretation is wrong, and that Argentina, like any other sovereign, is, and was, entitled to preferentially repay its unsecured debt. It was certainly the understanding of the IMF and the World Bank, who expect to be repaid first when they ask for it, and have indeed been repaid first when they asked for it in the past, pari passu notwithstanding.
So one way of seeing it is that Elliott came up with a crackpot, but compelling, interpretation of the terms, and that it's using it to distort the sovereign debt market to its advantage, since it was able to buy the debt at a serious discount, since the sellers understood that pari passu did not mean that Argentina could not pay the restructured part of the debt before the holdouts (Elliott and a bunch of Italian retirees who invested their money in something they had no business investing in).
posted by Monday, stony Monday at 3:47 PM on December 3, 2012 [1 favorite]
So one way of seeing it is that Elliott came up with a crackpot, but compelling, interpretation of the terms, and that it's using it to distort the sovereign debt market to its advantage, since it was able to buy the debt at a serious discount, since the sellers understood that pari passu did not mean that Argentina could not pay the restructured part of the debt before the holdouts (Elliott and a bunch of Italian retirees who invested their money in something they had no business investing in).
posted by Monday, stony Monday at 3:47 PM on December 3, 2012 [1 favorite]
right - the issue is a very narrow legal one that even if the current decision stands will quickly be corrected going forward for all future issuances.
Don't forget that for the most part though the bondholders who are damaged by Elliott's lawyering are also people who bought the debt at huge discounts.
posted by JPD at 5:26 AM on December 4, 2012
Don't forget that for the most part though the bondholders who are damaged by Elliott's lawyering are also people who bought the debt at huge discounts.
posted by JPD at 5:26 AM on December 4, 2012
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1) If you're going to use a visual aid to explain the bond markets, why the hell would you choose toys? Doesn't make sense.
2) OTOH, I am precisely this video's target market.
This post is missing key words, btw: "Felix Salmon". E.g. "Felix Salmon is my favorite financial blogger ever."
posted by billjings at 11:29 AM on December 2, 2012 [2 favorites]