Argentina Must Pay Hedge Funds $1.3 Billion
(CN) - Argentina must pay $1.33 billion to long-defaulted hedge funds that held out on discounted offers during the country's debt restructuring, the 2nd Circuit ruled.
If Argentina maintains its payments to creditors who took a discounted deal to get their money, then the country must also pay a group of holdout bondholders seeking all of the $1.33 billion owed, the federal appeals court in New York ruled.
However, the 2nd Circuit did not overturn a stay on enforcement should the U.S. Supreme Court intervene and review the case. The high court could hear the case when it returns in October.
An economic crisis in 2001 led Argentina to default on about $100 billion of sovereign debt. Most bondholders agreed to voluntary restructurings in 2005 and 2010, but some did not. The holdouts sued in New York, because Argentina had agreed to waive sovereign immunity in its bond indenture agreements.
In order to enhance the bonds' marketability, the South American country promised periodic interest payments and said the bonds would be governed by New York law. The country also promised that, in the event of default, unpaid interest and principal would become due in full.
It further promised that each bond would be payable to the transferee, regardless of whether it was a university endowment, a so-called "vulture fund," or a widow or an orphan.
But Argentina defaulted on the bonds, and then enacted legislation specifically forbidding future payment on them and continued to pay interest on subsequently issued debt.
In October 2012, the 2nd Circuit upheld injunctions issued by the district court to remedy Argentina's breach of its obligations.
U.S. Judge Thomas Griesa directed that whenever Argentina pays on the bonds or other obligations that it issued in the 2005 and 2010 restructurings, the country must also make a "ratable payment" to those who hold defaulted bonds.
The 2nd Circuit remanded, however, for the district court to clarify the injunctions' payment formula and effects on third parties and intermediary banks.
The district court answered in November 2012 with those clarifications, as well as an opinion explaining them. Argentina appealed.
The republic was invited to propose an alternative payment formula for the outstanding bonds, but Argentina instead proposed an entirely new set of substitute bonds.
"In sum, no productive proposals have been forthcoming," 2nd Circuit Judge Barrington Parker wrote. The court noted that the nation's lawyer told the court during oral arguments that Argentina "would not voluntarily obey" the district court's injunctions, even if they were upheld by this court.
"Moreover, Argentina's officials have publicly and repeatedly announced their intention to defy any rulings of this court and the district with which they disagree," Parker wrote.
Analysts have said the court's ruling buys Argentina more time on their appeal efforts.
Aurelius Capital Management and Elliott Management Corp.'s NML unit sued Argentina for full repayment of their defaulted bonds, and have chased the country for repayment across the globe.
Holdouts have argued in U.S. courts that the equal-treatment clauses in their defaulted bonds mean those securities should have the same payment priority as new bonds issued in 2005 and 2010 - when the country restructured its debt -- at heavily discounted rates.
Argentina has challenged certain aspects of the amended injunctions, and appeals have also been followed from other entities: a group of exchange bondholders calling themselves the Exchange Bondholder group; The Bank of New York Mellon, which is the indenture trustee to Exchange Bondholders; and Fintech Advisory Inc., a holder of Exchange Bonds.
But because their interests are not "cognizably affected" and the third parties lack standing, their appeals were dismissed.
"At the same time, their arguments are not lost because they requested that, in the event they were not deemed appellants, the court consider their arguments as coming from amici curiae," Parker wrote. "Because Argentina contends in its own appeal that the amended injunctions should be vacated because, among other reasons, they are inequitable to exchange bondholders, we will consider the arguments of EBG, Fintech, Euro Bondholders and ICE Canyon as arguments from amici curae in support of Argentina."
Parker was also unmoved by Argentina's pleas.
"Argentina advances a litany of reasons as to why the amended injunctions unjustly injure itself, the exchange bondholders, participants in the exchange bond payment system, and the public," he wrote. "None of the alleged injuries leads us to find an abuse of the district court's discretion."
Argentina argued that the amended injunctions unjustly injured it in two ways: that the injunctions violate the Foreign Sovereign Immunities Act by forcing Argentina to use resources that the statute protects, and that the injunctions' ratable payment remedy is inequitable because it calls for it to bondholders to receive their full principal and all accrued interest when exchange bondholders receive even a single installment of interest on their bonds.
"However, the undisputed reason that plaintiffs are entitled immediately to 100 percent of the principal and interest on their debt is that the [fiscal agency agreement] guarantees acceleration of principal and interest in the event of default," the court wrote.
The three-judge panel agreed with the district court's conclusion that the amount owed to plaintiffs is the accelerated principal plus interest.
"We believe that it is equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing," Parker wrote. "The reason is obvious: the first creditor is differently situated from other creditors in terms of what is currently due to it under its contract."
He said the district court's decision did nothing more "than hold Argentina to its contractual obligation of equal treatment."
Global investors worry that if the holdout creditors prevail in this case, future investors may resist other nations' debt-restructuring offers in the hopes of a bigger payout.
The 2nd Circuit disagreed.
"This case is an exceptional one with little apparent bearing on transactions that can be expected in the future," Parker wrote. "Cases like this one are unlikely to occur in the future because Argentina has been a uniquely recalcitrant debtor and because newer bonds almost universally include collective-action clauses which permit a supermajority of bondholders to impose a restructuring on potential holdouts."