Elliott vs Argentina: Enter the crazy

August 27, 2013

Back in February, when I made my prediction for how the Argentina endgame would play out, I got the date wrong. I did, however, get the substance right:

One likely scenario is that the appeals court will uphold Griesa’s decision at some point in April or May, forcing a big default in June. At that point, Argentina will probably launch an exchange offer under Argentine law, under which anybody holding currently-performing bonds would be able to swap them into bonds with substantially identical terms, just payable in Buenos Aires rather than New York. Given that Argentine-law bonds have been trading at tighter spreads then US-law bonds for some months now, one can assume that nearly all bondholders would jump at the opportunity to keep on getting their coupons.

Argentina might even take the opportunity to give its holdouts a third bite at the cherry, offering them some kind of option to take a haircut and get performing Argentine-law bonds in exchange for their defaulted debt. But many holdouts would still remain, and will surely continue to pester New York courts for the foreseeable future.

Timing aside, this is exactly what has now happened. Argentina might still be in the midst of its Supreme Court appeals, but given the choice between working within the US legal system and blatantly working against it, the country seems to have decided that it wants to do both at once.

For if Argentina does indeed open up this new exchange offer to existing New York-law bondholders, as the president said today that it would, that would might* be in clear and outright violation of Judge Griesa’s existing court order — the one which has not been stayed, which prevents Argentina, or its agents, from doing anything which would re-route payments on restructured debt. Doing so would pretty much guarantee that a loss for Argentina at the Supreme Court level, and might well give the appeals court all the excuse that it needs to lift the current stay.

From a tactical perspective, then, this doesn’t make a huge amount of sense: Argentina wants to delay proceedings as much as possible, and this action risks speeding them up very quickly indeed. And from a practical perspective there are massive obstacles in Argentina’s way as well. Argentina can’t do this alone: it’s going to need the help of bankers and lawyers and payment agents and trustees and the whole panoply of the international capital markets, if it’s going to come up with a way in which existing bondholders, with bonds registered in New York, can take those bonds and exchange them for new bonds which are registered in Buenos Aires.

Now Argentina has some very clever and very expensive legal minds working for it at the venerable firm of Cleary, Gottlieb, Steen and Hamilton — and maybe they’ve come up with a genius way of doing just that. But on its face, it’s going to be very difficult indeed for Argentina to find any companies in America which will help it blatantly and directly violate an existing court order — since the court order explicitly includes not only Argentina but also anybody aiding and abetting it.

If Argentina does manage to find a way to jerry-rig a bond exchange, however, then that exchange is likely to be taken up with great alacrity. Reuters poses the question well:

Fernandez’s proposal of a new bond swap raised questions about whether investors would be interested in taking Argentine bonds in lieu of foreign debt, given strict currency and capital controls that the left-leaning Fernandez government has imposed.

The answer to that question is hell yes, investors would be very interested in taking Argentine bonds in lieu of foreign debt. Here’s where I part company with the Associated Press:

Analysts have predicted that any attempt to pay bondholders in Buenos Aires rather than comply with the U.S. courts will fail, reasoning that few bondholders who now can turn to courts in New York in any dispute with Argentina’s government will be willing to risk a change that makes Argentine courts the final arbiter.

This, I think, is completely wrong. As we’ve seen time and time again over the past ten years, the ability to turn to New York courts in a dispute with Argentina is worth, to a first approximation, zero. On top of that, local-law bonds are trading inside foreign-law bonds — which is another way of saying that you get an immediate price boost to your debt as soon as you change the jurisdiction from New York to Buenos Aires. So give bondholders half a chance, and they will jump at the opportunity to change the jurisdiction and receive, in return, much more certainty that they’ll be paid in future. Sure, there are worries about exchange controls and the like. But being paid in Argentina is always better than not being paid at all.

If this exchange offer does go ahead, expect an extremely high acceptance rate — somewhere well north of 90%. And then, expect whatever New York law bonds remain to go into default shortly thereafter. That will trigger Argentina’s credit default swaps, which will pay out at a very high rate, since the value of defaulted New York law debt will at that point be extremely low. Remember that Elliott Associates is reported to own a large quantity of Argentine CDS; that means a big payday for Elliott, even if it doesn’t receive the $1.3 billion that the New York courts have ordered it be paid. Elliott, it seems, wins either way.

But frankly I have my doubts that the exchange offer will simply appear, as the Argentine president seemed to say that it would. An anonymous Argentine government official told Bloomberg that the exchange offer would only be opened up to existing New York bondholders “depending on the nation’s request for the Supreme Court to take their case” — so Kirchner might just be telegraphing what she intends to do if and when Argentina loses in Washington.

If that’s the case, she’s crazy: you might intend to do such a thing, but you don’t say that you intend to do such a thing, since that only damages your chances with Plan A, which is to get the Supreme Court to overturn the current ruling. But of course we all know that Cristina Kirchner is crazy.

All of which is to say: Kirchner has now dragged this whole saga deep into the land of the weird and irrational. Maybe we will soon see an illegal exchange offer targeted at existing New York bondholders; maybe we won’t. Either way, the rhetoric in this case will only get louder and less constructive. Expect much more heat than light going forwards.

*Update: Mark Weidemaier has found what seems to be a loophole. There were two original orders from Judge Griesa; the first implemented the draconian remedy for breaching the pari passu clause, and that was the one which was stayed pending appeal. Then there was a second “no workaround” order, which was not stayed, preventing Argentina from attempting anything clever like the exchange offer Kirchner just announced. When the Second  Circuit stayed its ruling pending appeal to the Supreme Court, however, it seems to have stayed “the November 21, 2012 orders.” Which seems to include not only Griesa’s remedy, but also the no-workaround order. If that’s the case, Argentina now has a very short window of time to get an exchange done, before the Second Circuit realizes what it has done and reinstates the no-workaround order.


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