Argentina’s [Insert Adjective Here] Debt Crisis

Mark Weidemaier & Mitu Gulati

Okay, everybody ready? Argentina? Check. Debt crisis? Check. Cristina Kirchner and crew back in office to, um, right the ship of state? Check. Last time round, their plan involved hurling insults at a U.S. federal judge. Like Spider Man: Far From Home, it was briefly amusing, lasted far too long, and ended badly. Argentina eventually caved in 2016, paying handsome sums to creditors who had sued it in U.S. courts. We won’t rehash the details, but there is great coverage by Joseph Cotterill, Matt Levine, Felix Salmon, Robin Wigglesworth and others. We also covered it extensively here on Credit Slips.

Yes, sure, it would be nice to have a break of more than three years between the formal end of an Argentine debt crisis and the start of a new one. But here we are. Argentina has again borrowed many billions USD under New York law. This time, the legal issues will be a bit different, because Argentina’s debt stock has different legal characteristics. Below, we offer a few preliminary thoughts.

Voluntary Reprofiling

On August 28, Argentina announced a plan to conduct a “voluntary reprofiling” of debt (here). Reprofiling is a fancy term for maturity extension. That sounds gentle—just a flesh wound!—but a long maturity extension can impose a significant NPV cut. Plus, reprofiling might be just the first step on a path that leads to a brutal debt restructuring. Creditors will distrust rosy predictions that a reprofiling will fix the problem. Many will refuse to participate. What happens then? 

Last time around, after its 2001 default, Argentina’s NY-law bonds required the unanimous approval of all the creditors before any alterations to the payment terms could be made. That requirement, of course, magnifies the risk of holdouts. And in fact, Argentina spent the next 15 years engaged in various legal battles (e.g., here).

This time, Argentina’s bonds have collective action clauses, or CACs, which let a super-majority of creditors bind a dissenting minority. If Argentina gets the requisite proportion of creditors to agree, it can impose a reprofiling on the entire group. Of course, the devil is in the fine print.

The Different Types of CACs

Different Argentine bonds have different CACs. The first, often referred to as “Uruguay-style,” appears in bonds issued in the country’s post-default exchange offers in 2005 and 2010. These CACs let the government modify multiple series of bonds with the approval of holders of (i) 85% in principal amount of all affected series and (ii) 66.67% of each affected series. Let’s call this the aggregated, dual-limb vote. Alternatively, the government can ask each individual series of bonds to vote (i.e., without aggregating that vote across the entire affected debt stock). If it goes this route, it must win the approval of holders of 75% in principal amount of each series. The government will likely have a harder time restructuring its debt if it uses this series-by-series voting method (see here).

Assuming the government holds an aggregated, dual-limb vote—i.e., the route in which it must win 85% approval in the aggregate and 66.67% of each series—prospective holdouts will need 34% of a bond series to block the restructuring of that series. For larger distressed debt funds, this is achievable given the large potential recoveries.

The second type of CAC appears in bonds Argentina issued after settling with holdouts in March 2016 (here). For two reasons, these CACs are more favorable to the government than the CACs in its 2005 and 2010 exchange bonds. First, these clauses also allow the government to conduct an aggregated, dual-limb vote, but the voting threshold is lower. The overall vote required across all affected series (in aggregate) is 66.67%, and the vote required for each individual series is a bare majority. Better still, the issuer can restructure under a so-called single-limb vote in which prospective holdouts cannot acquire a blocking position (50%) in a single bond series. Here, the restructuring goes forward and applies to all bonds if approved by more than 75% of the entire affected debt stock, without any requirement of approval by each series. The catch—which we discuss below—is that the restructuring must also satisfy a “uniformly applicable” standard. 

All else equal, then, it should be easier to restructure the 2016-18 bonds than the 2005 and 2010 bonds. Should we expect to see holdout specialists like Elliott and Aurelius cluster into the 2005 and 2010 bonds? And should those bonds be trading at a premium compared to bonds issued more recently?

Not necessarily. Holding out gets an investor nothing unless it can enforce its claims. It is true that, after Argentina’s last default, Elliott, Aurelius, and a few other funds managed to get paid, often quite handsomely. Their success was due in no small part to patience and clever strategy. But it also resulted from a series of legal blunders on the part of the Argentines. These include the government’s decision not to use exit consents in 2001-02, its failure to eliminate the pari passu vulnerability via a bondholder vote even though it had the requisite votes to do so, its enactment of the “Lock Law” in 2005, and Ms. Kircher’s (mis)behavior vis-à-vis the U.S. federal judiciary. It shouldn’t be too hard for Argentina to avoid making similar missteps this time around. Plus, the Second Circuit has taken steps to limit the pari passu strategy, which is what finally won the day for investors in the last fight. This includes two decisions within the last few weeks in the BisonBee and Lucesco cases.

Back to Reprofiling and “Uniformly Applicable”

Earlier, we noted that one of the conditions for the using the single-limb voting method (i.e., the one requiring approval of >75% in principal amount of all affected bonds regardless of the vote in any particular series) was that the restructuring offer satisfy the “uniformly applicable” condition. This is a fairly new requirement, because the aggregated, single-limb voting method is itself new. So its meaning hasn’t been tested in the courts. One important question is whether the standard allows the government to give very different treatment to investors, in NPV terms. For example, an investor whose bond is about to mature suffers a much greater loss from, say, a 5-year maturity extension than an investor whose bond is ten years from maturity.

The “uniformly applicable” standard is satisfied if bondholders are “invited to exchange, convert or substitute their debt securities on the same terms for (x) the same new instruments or other consideration or (y) new instruments or other consideration from an identical menu of instruments or other consideration.” The plain text of this standard would seem to allow significant differences in treatment from an NPV perspective. That is, as long as investors get the same “new instruments or other consideration”—in our example, a 5-year maturity extension—the government has given them “uniformly applicable” treatment. But of course, this will make many investors unhappy. And conceivably the text permits a different interpretation. (Is my consideration really the same as yours if the government offers me only 50% of my claim while offering you 95%?) This difference in NPV treatment is a common feature of many debt restructurings. But the “uniformly applicable” standard is a new one and may inject a bit of uncertainty.