ATFA Media Teleconference Transcript:
Argentina's Pari Passu Appeal
Moderator: Robert Raben
December 27, 2012
9:34 am CT
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Argentina's 2nd Circuit Appeal: What to Look for in the Pari Passu Case on the Eve of Argentina's Filing conference call.
During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question, please press the 1 followed by the 4 on your telephone. And if at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Thursday, December 27, 2012.
And I would now like to turn the conference over to Robert Raben, Executive Director for the American Task Force Argentina. Please go ahead sir.
Robert Raben: Good morning. Thank you very much (Amanda). Thank you all for joining this call. I'm Robert Raben and the Executive Director of the American Task Force Argentina. We deeply appreciate you joining this important call at this time of year. I know it's a busy time with family and friends and you're willingness to speak for a few moments about this important matter really speaks to the urgency and gravity of the situation.
I am joined today by Professor John Baker who is a Visiting Fellow at Oriel College University of Oxford and Richard Samp, Chief Counsel at the Washington Legal Foundation and each of - ask each of them to speak for a few moments and then we'll quickly move to your questions, which I know are pressing.
On tomorrow, December 28, Argentina is required to file briefs in the latest stage of NML v Republic of Argentina also known now as the Pari Passu Case.
Argentina has given United States Corps and the plaintiffs the run around for years since defaulting on $81 billion in 2001, the largest sovereign default ever.
As Latin America's third largest economy with now significant reserves, the nation has the means to repay its creditors in full but continues to refuse to do so.
Federal courts in the United States have numerous times noted Argentina's quote appalling record of keeping its promises to its creditors end quote. While Argentina has been make regular interest payments through exchange bond quotes, it has paid nothing to the so-called holdouts.
Argentina even passed an infamous Lock Law in an attempt to slam the door on future negotiations. There's more. You've heard me talk about this in the past and I will be back after our distinguished attorneys have quickly presented. Professor Baker.
John Baker: Yes. Good morning. I think in reviewing things it's helpful to go over the posture of the case because there could be some confusion about this. I know that all the parties on the phone know about the basic decision from the Court of Appeals and the 2nd Circuit.
But then Argentina filed a petition for rehearing and rehearing en banc. And then they filed this motion for an emergency stay. It was interesting the court granted the stay but then set it down for an argument on merits. And that argument is going to take place in February. And between now and February the different parties are going to be filing their briefs.
It's important to understand that the actual issues in the original decision by the Court of Appeals in this October 26 opinion, those issues - the merits issues are not up for re-discussion. The court remanded on two matters dealing with the remedy.
Then the District Court issued - (now) issued it's order - revised order and that revised order from November 17 that's what's going up. And in that revised order there are two basic issues. And that was the lower court had to decide what the term ratable payment meant; the Appellate Court had two options looking - it was looking at.
And the second one very important was how far would the injunction extend. The Appellate Court was very concerned about the Uniform Commercial Code provision that requires an injunction to not affect intermediary banks. The court also mentioned third parties.
So those are the two basic issues that are supposed to be covered on appeal. Appeal merely as a remedy. However, in its really short discussion related to the emergency stay, it was clear that Argentina was trying to remake the same arguments and arguing that the kind of ratable payment that should be made was the one that Argentina had offered all along, namely the payment that it take a reduction.
That argument seems to be on that Argentina will continue to press. And it is very unlikely the Court of Appeals is going to accept that kind of an argument.
So the question will be whether the choices made by the District Court as to the two issues, ratable payment and the third party and intermediary banks whether those satisfy the Court of Appeals.
I think that basically covers the overview and I can come back and deal with some more specific questions.
Robert Raben: Thank you so much. Attorney Samp.
Richard Samp: I think that Professor Baker's point is worth repeating, which is that the issues coming up in the short-term in the Court of Appeals have really nothing to do with reconsidering the October decision of the 2nd Circuit that it is the same. The panel is going to stand by its original decision, which gave teeth to the Pari Passu clause and also said that injunctive relief was proper.
But the argument that Argentina keeps bringing up is if you go ahead and enforce that original judgment you're going to cause chaos in financial markets around the world and therefore we ought to reconsider what's going on.
And that's what I would like to address briefly that really there isn't this danger for chaos around the world because first of all Argentina is unique in terms of what it has done over the years to disregard the interest of its creditors so that it really is not at all in a similar situation.
In particular there are European countries that have difficulty making payments. The District Court of this case made a very clear finding that Argentina has sufficient foreign assets to make regular payments on its existing exchange bonds at the same time that it satisfies the judgment in this particular case brought by the so-called holdout.
One of the reasons why the sort of situation that arose here could not arise in the future simply because you start enforcing Pari Passu clauses is that most bonds that get issued these days have what are called collective action clauses.
And what those mean is that that gives an incentive for the creditors to get together and decide collectively what sort of relief they want. And if a significant percentage of the creditors agree to a particular type of renegotiation then all creditors are bound and there can't be any holdouts. Generally somewhere from 70 to 80% have to agree to these conditions and then everybody is bound.
So the particular bonds that we're talking about here didn't have that provision. Instead when Argentina defaulted on its bonds, it just said take it or leave it. You can't do anything to us so you've got nothing unless you agree to take a 70% haircut.
Now obviously creditors are helped by having these collective action clauses because they can then bind together. But it also means that you avoid chaos in the markets because 70% or more of the creditors can bind all of the creditors.
Now there have been some complaints that well what happens if there's one small bond issue that you can't get 70% on even though all the other bond issues you've gotten 70% of the creditors. And that really isn't too much of a problem in that in almost all cases now there are what are called aggregation clauses, which allow a 70% rule to apply across the board.
Furthermore, this particular case, which rises from the 2nd Circuit, involves application of New York law. Most of the major sovereign debtors who are in danger of default are all in Europe and those countries have issued bonds that aren't governed by New York law. They are governed by treaties established in the eurozone and under those treaties they are required to have collective action clauses.
So again, this has - the decision in this case has nothing to do with the ability of say Greece or Portugal or Spain to restructure their debt. The IMF I think has done surveys which have shown that there have been something like 600 sovereign debt restructuring in 95 countries over the last 60 years.
And the - in most of them there are some sort of Pari Passu clauses and there really is no suggestion that those kind of restructurings will not be permitted to go forward.
The one other thing I guess to mention is the particular clause at issue here has what is called an equal treatment provision, which is actually a good deal stronger than language that was included in other bonds. It's probably not surprising that the creditors demanded this stronger language because of the history of Argentinean defaults in the past.
And so among other things creditors demanded that Argentina waive sovereign immunity and allow itself to be sued in New York courts in order to have money leant to them.
So a little bit disingenuous for Argentina now to be complaining that its sovereignty is being violated and that the decision in some way violates the terms of the Foreign Sovereign Immunities Act because in fact in order to get the money in the first place Argentina agreed to waive all of those arguments.
So with that, I'll turn it back for further discussion.
Robert Raben: Thank you very much. (Amanda), we can open it up to questions now. But let me just throw out one. This is Raben.
You know, I'm an attorney in the United States and even I find this quite complicated. I was curious Professor Baker or Attorney Samp. What's the bottom line here? What's going on? Is this Argentina, which has fought tooth and nail not to meet its commitments? Are we grasping - are they grasping at legal straws here? Is there no fight they won't make in the courts? What's kind of the short version of what's going on here?
John Baker: Well I think there are different ways to look at it. I know a little bit about Argentina and I know a little bit about the civil law system. And in the civil law system even though Argentina purports to have a constitution that follows that of the United States, it really doesn't.
In civil law countries the legislature it really is supreme at least in theory. And so when they passed this Lock Law, they have a sense that it can't be disturbed. And they keep making this claim the legislature has passed this law. We can't do anything.
It's a different mentality one and two, this is not the only area where Argentina's been sued. In the World Bank arbitrations have been sued over 40 times. And but they've had some wins there. So and they think that they can just continue to litigate and through attrition gain some ground.
Robert Raben: Thank you very much. (Amanda), we can open it up to questions if there are any.
Operator: Of course. Thank you, sir. Ladies and gentlemen, if you would like to register a question over the telephone lines, please press the 1 followed by the 4. You will hear a three-toned prompt to acknowledge your request. And if you question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, to register a question, please press the 1 followed by the 4. And one moment please for our first question.
And our first question comes from the line to (Rafael Manuel Ruiz) with (La Nacion). Please go ahead.
(Rafael Manuel Ruiz): Thanks. Hi. Good morning to you all. Thank you for organizing this conference call. I have two questions for both Professor Baker and for Mr. Samp. Number 1 is there have been moves in Argentina to sort of like extend the last offer that Argentina made to bondholders to settle this - to settle this litigation.
One, I would like to ask you what do you think the Court of Appeals reaction would be to - if Argentina made that proposal? That's Question Number 1. And Question Number 2, Argentina has already said that it's willing to take the case all the way to the Supreme Court. My question is how likely do you think is that the Supreme Court will take this case?
John Baker: On the first question that offer that you're talking about of giving them the same terms that everybody else had and that's been rejected both by the District Court and by the Appellate Court. I think that's a non-starter.
Two, on the procedure here forward, first of all there is still pending a petition for rehearing - the petition for rehearing on bond. It is important to know though that historically in the 2nd Circuit that court grants very few - very few petitions for rehearing on bond. And it is most unlikely that the panel itself would grant such a rehearing since it was unanimous.
So it's first of all got to have a final ruling from the Court of Appeals on those points. That will await this current appeal on the remedy. After that it would - Argentina presumably would apply for what's called (sociare).
Normally the Supreme Court in most instances takes cases only when there is a conflict between the different circuits. And as far as I know there's not a conflict here per se.
Now the lawyers would attempt to create a kind of conflict and argue there's a conflict somehow and that could be a possibility. But you can in some cases where there is no conflict, the court for various reasons would take a case. And there's no way of absolutely predicting that.
And there's no doubt however that if the Justice Department did urge the Supreme Court to take the case that that would have more weight without doubt. But that doesn't mean they would take it. So the odds are not good for Argentina but they're not impossible either.
Richard Samp: I would agree with Professor Baker on both of those points. I think that the 2nd Circuit for years has been considered the top authority on many of these financial issues and the U.S. Supreme Court is very often willing to defer to whatever the 2nd Circuit says and therefore rarely reviews its decisions.
And the one potential wildcard here would be if the United States Government weighed in and said this for foreign policy reasons it's important for the United States Supreme Court to hear this case. It might consider hearing the case. But other than that I don't see that as a realistic possibility.
Now in terms of the reaction of the court to weigh the potential terms of settlement by Argentina, frankly I can't imagine that that would be a consideration.
I think that the courts are probably going to be far more interested if they're interested at all in any of these kinds of policy arguments, they'll be more interested in the arguments raised by third parties such as the exchange bondholders that their rights are somehow being hurt. And those sorts of things would potentially have a bearing on the court's decision. But any potential settlement I don't think is really relevant.
Operator: As a reminder ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4. And our next question comes from the line of (Bob Badforest) with Bloomberg News. Please go ahead.
(Bob Badforerst): Good morning. Happy holidays. Can you please give us a little bit of an idea about how important are the issues that are going to be heard and beginning with the briefing tomorrow? And specifically what I'm wondering is depending on how the court rules on the third party intermediary bank issues, what is the potential here that the defaulted bondholders could win on the Pari Passu issue but then not have a remedy for collecting on their bonds?
John Baker: Well at the District Court level the plaintiffs recognized that there were limitations. And I think until we see the briefs of each one of the different interveners and interested parties to know exactly from their perspective and their obligations what the constraints are on them it's very difficult to know.
If obviously the court excluded from the remedy all kinds of parties and then there was a possibility that Argentina could avoid it, certainly Argentina would take that route.
On the other hand, the Court of Appeals in its first decision understood that they were dealing with a country that would do anything to avoid its obligations. So there's ever reason to believe that while they will respect the rights of these other parties, they're not going to want to let Argentina slip through the noose.
Richard Samp: I think one thing to keep in mind when you talk about the plaintiffs perhaps being potentially without a remedy, the only remedy they're entitled to is equal treatment. So that if Argentina decides it's not going to pay anybody, it doesn't have to.
Now that might end up excluding Argentina from any participation in debt markets or the next generation but they don't have to pay. All they have to do under the court's order is to treat everybody equally.
Now it may be that the 2nd Circuit will exclude certain intermediaries from the terms of the injunction. However, I suspect strongly that they are not going to exclude people who would be getting payments directly from Argentina; in particular the trustee under the bonds is the Bank of New York Melon.
And the idea that a U.S. court would allow a U.S. corporation to aid and abet Argentina in its flouting of a federal court order seems a little bit far fetched. And even if payments are made in a foreign country, I cannot believe that the courts would allow an American bank to do such a thing.
And the important thing to remember is Argentina has agreed to the jurisdiction of the U.S. court and is bound by an injunction. Now they cannot be ordered to pay money. However, they can be held in contempt of court if they start secretly negotiating to change the identity of the trustee so that payments start getting made through other routes.
And right now in the District Court there are discovery proceedings going on to allow the plaintiffs to know any such activities that may be going on so that I think you would very quickly find that if a new trustee were established and payments were to be made to that other trustee in Europe say that if that bank had any presence at all in the United States that it would be bound by the injunction as well.
Operator: As a reminder ladies and gentlemen to register a question, please press the 1 followed by the 4. And our next question comes from the line of Michael Washburn with IFLR. Please go ahead sir.
Michael Washburn: Yes. Good morning. Happy holidays everybody. Mr. Samp, you made some interesting points and talked about the fact that most bonds issued these days have collective action clauses and these bonds did not. And you said creditors are helped by having CACs because they can bind together. You avoid chaos in the marketplace because 70% of creditors can bind others.
I might amend that to some creditors are helped by having CACs but some lawyers I've interviewed on this topic have expressed a concern that there might be a combination between bondholders in the sovereign country to favor those bondholders in exchange for resolving a legal question in a way that's, excuse me, disadvantageous to the remaining bondholders.
And this could create problems down the line in a domestic bankruptcy court where a judge might be willing to listen sympathetically to the bondholders who are in the minority.
And there's also the serious possibility of the CAC that has forced under one indenture, not a body of bondholders holding under a different indenture. And so I have heard a lot of serious concerns about the potential for abuses when CACs are in place and I'm not sure that they're really a pat solution.
Richard Samp: I mean I agree with you that there are potential problems. In terms of bankruptcy courts later being sympathetic to the claims of people that they have been treated unfairly, I think that's a good reason to make sure that any restructuring treats everybody exactly the same. And if you do that, there shouldn't be a problem and if you on the other hand treat some creditors better than others, you're just asking for trouble.
Now the problem that you have different types of bonds that wouldn't all be covered by the same collective action clause can be a problem and that's why you have in many bonds aggregation features that mean that every bond would be covered so long as you had say 70% of all bondholders.
Not every bond has these aggregation features in the past. I think they do going forward. So that's potentially a small problem. I don't see that as being a huge problem because presumably if you can't get 70% of all various types of bonds to agree, then maybe that suggests that the sovereign that is seeking to restructure isn't offering sufficiently good terms to the bondholder so that they would agree.
Michael Washburn: Okay.
Operator: And our next question comes from the line of Arturo Porzecanski with American University. Please go ahead.
Dr. Arturo Porzecanski: Good morning and happy holidays. This is a question about the involvement of the United States Government in this case, which has happened repeatedly through the submission of various amicus briefs going all the way back to I think 2004 or 2005.
Earlier this month they filed a petition to request that if the Solicitor General authorizes it they'd be able to file an amicus brief no later than tomorrow. And in this case apparently it's in support of the petition for panel rehearing and for a rehearing en banc.
So it's not just Argentina. It's United States Government and, as you know, it's a lot of other bondholders who are getting paid who want to reopen the can of worms, who want a bigger discussion. They don't want just the very narrow discussion that otherwise would ensue.
So I was just wondering if you have any views on this activism on the part of the United States Government and in particular what influence they might have in terms of persuading the Court of Appeals to do an en banc rehearing.
Richard Samp: I think...
John Baker: I don't think it's going to have much effect on the Court of Appeals. Where we have, as already discussed in effect, might be enough petition for (unintelligible).
Richard Samp: And I do think it's important to point out that the - what the United States is contemplating doing is filing in support of rehearing of the October decision. I don't believe that the United States is intending to weigh in on the same issues that are being considered by the panel on an expedited basis. So Argentina is filing a brief tomorrow. The United States brief will not cover those same issues at all.
In terms of the influence of the United States on the courts, they certainly had some influence but I think it's worth pointing out that the United States filed a brief this past spring in support of the initial appeal of Argentina and obviously that - the brief was not sufficient to persuade the panel that heard this case.
My understanding is that the general view of the United States is that Argentina ought to repay its debts. That it is on the side of creditors but that the United States Government feels that those issues ought to be the subject of bilateral negotiations between Argentina and the United States.
And I think in theory that's perhaps a potential way to go. In the case of Argentina obviously many years of bilateral negotiation have not led to a whole lot of repayment.
Operator: Once again ladies and gentlemen if you would like to register a question on the telephone lines, please press the 1 followed by the 4. And our next question comes from the line of (Patty Tao) with Aberdeen Asset Management. Please go ahead.
(Patty Tao): Thank you Professor Baker and (unintelligible). You mentioned if exchange bondholders make a brief and claim that their interest is being hurt, I guess it's based probably on Judge (Greer) (assets) ruling about partially paying out the principle and the past due interest.
Would only payment of past due interest to holdout investors be considered Pari Passu given that the exchange bondholders have only received interest as of date since 2005?
John Baker: I'm not exactly sure I have the question correct. But on the question of ratable payment, the Appellate Court only proposed or discussed two options. And the lower court shows one option; the one that favored the plaintiffs. And if you want to repeat it, I didn't quite understand exactly what you were saying about if they only paid a certain amount.
(Patty Tao): Okay. Thank you, John. I was saying as far as I understand it, Judge (Greer) has ruled the payment to NML Capital. Is the past due interest plus partially the (unintelligible) principle? Is that right?
John Baker: No. Basically NML would get paid everything because it's all due...
(Patty Tao): Right. Okay.
John Baker: ...it's all due under the acceleration clause.
(Patty Tao): Yes. But my question is would only past due interest be considered Pari Passu because the exchange bondholders have only got the interest, not their principle?
John Baker: No. Well the District Court said no because of the acceleration clause that the...
(Patty Tao): Right.
John Baker: ...other bondholders are only due at this point their interest. But the plaintiffs are due everything. And your question is a good question as to whether the Court of Appeals would consider some point in between the two options that it had mentioned in its opinion. So we'll...
(Patty Tao): Yes.
John Baker: ...have to see what the different - what the different parties argue on that. And that is a legitimate argument under - I say legitimate meaning it's within the scope of what the Appellate Court is open to hearing. That is what does this term ratable payment mean. And one could conceivably make that argument.
(Patty Tao): Okay. Thank you.
Richard Samp: I think one thing to note here is that the real concern of the exchange bondholders is that Argentina will default and won't pay them anything. And they don't really care how much goes to the holdouts so long as they get their payment. And - but they're afraid that if any amount is required to be paid to the holdouts that Argentina will default and they'll get nothing.
Obviously that's - given Argentina's history that's a legitimate concern on their part. But Argentina has enough to pay the whole thing if it wants to. So really the ball is in Argentina's court. How the 2nd Circuit ends up deciding the ratable payment issue presumably won't affect how Argentina acts because Argentina has said that regardless of how the ratable payment issue is resolved, it won't pay anything.
And clearly any amount of ratable payment is going to be a payment well in excess of the amount that would have been payable had the holdouts agreed to the original terms of the exchange bonds. And so if Argentina is unwilling to pay more than the original exchange terms, then there's going to be a default.
Operator: Once again ladies and gentlemen to register for a question, please press the 1 followed by the 4. And we do not appear to have any further questions at this time. I will turn the call back to you.
Robert Raben: Thank you very much (Amanda). And Professor and Counsel Samp we very much appreciate your gathering together at this quiet but important time of the year. We are available. If there are follow up questions, you can contact us by email at media@atfa.org - media@atfa, A-T-F-A dot org. And I, Robert Raben, will field those and get you answers as soon as possible.
Thank you very much for gathering. And enjoy your New Year.
Operator: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
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