Bondholder beats Argentina on appeal but still may not recover

July 21, 2011

For vulture funds holding defaulted Argentinean bonds, the U.S. Court of Appeals for the Second Circuit has been a brick wall with only the tiniest of chinks. In recent years, the appellate court has rejected all sorts of clever stratagems the bondholders and their lawyers have dreamed up in an effort to get their hands on Argentine assets, including an attempt to attach assets belonging to Argentina’s central bank and pension system.

One notable exception to the rule of bondholder frustration at the Second Circuit was the appellate court’s 2006 ruling that a holder called Capital Ventures International had the right to attach Argentine collateral (in the form of U.S. and German government securities) held by the Federal Reserve Bank in New York. Argentina put up the securities to back its 1992 issuance of so-called “Brady bonds,” which, under a plan pushed by then-Treasury Secretary Nicholas Brady, exchanged $28.5 billion in defaulted bonds for collateralized Brady bonds due in 2023. The Second Circuit’s 2006 ruling meant that if Argentina attempted to restructure or exchange the Brady bonds before their 2023 maturity, CVI was first in line to get its hand on the securities held at the Fed.

There was just one big problem with the 2006 appellate ruling for CVI and its lawyers at Ballard Spahr and Cozen O’Connor: it came too late. By the time the Second Circuit overturned a lower court ruling and granted CVI a right to the Fed-held collateral, Argentina had already completed an exchange of $2.8 billion in Brady bonds. Because CVI only had a right to the collateral at the Fed if Argentina was engaged in a Brady bond exchange, CVI was out of luck, despite its appellate win. CVI was left holding a big-money judgment against Argentina — more than $200 million in CVI’s case — with no foreseeable way to collect on it.

Then Argentina pushed its luck. In 2010, the country proposed another exchange for holders of the collateral-backed Brady bonds. Mindful of CVI’s rights under the 2006 Second Circuit ruling, Argentina’s lawyers at Cleary Gottlieb Steen & Hamilton asked Manhattan federal court judge Thomas Griesa to modify CVI’s attachment order to permit the $100 million Brady exchange to go forward without giving CVI a chance to snare the collateral held at the Fed. Judge Griesa, who oversees all of the litigation between Argentina and its disgruntled bondholders, agreed to the modification. But he also stayed his order so CVI could return to the Second Circuit.

On Wednesday a three-judge appellate panel once again ruled in CVI’s favor. (Here’s Reuters’ story on the ruling; here’s the 23-page opinion by Judge Gerard Lynch for a panel that also included Judges Pierre Leval and Guido Calabresi.) The Second Circuit concluded that CVI is entitled to maintain its right to attach the collateral, even if that means Argentina’s $100 million Brady bond exchange will be blocked. The appeals court rejected various arguments by Cleary’s Carmine Boccuzzi Jr. about the Brady bondholders’ senior lien on the collateral and unilateral right to amend the original Brady exchange agreement. The judges also said Argentina’s situation wasn’t dire enough to justify curtailing CVI’s rights.

So can CVI collect the more than $200 million it’s owed via the Fed collateral? Not so fast, said M. Norman Goldberger of Ballard Spahr, who argued at the Second Circuit for CVI. If Argentina calls off the exchange and leaves the Brady bonds in place until the mature in 2023, CVI won’t be able to get its hands on the collateral held at the Fed.

“I wish [the ruling] meant I’d get CVI’s money right away, but it doesn’t,” Goldberger said. What it might mean, though, is that CVI can persuade Argentina to enter negotiations, Goldberger added. “We don’t have any interest in screwing [Brady bondholders],” he said. “We want Argentina to talk to us, and they won’t. We weren’t in this for leverage. We’re just playing by the rules.”

(Reporting by Alison Frankel)


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