Investors in Province of Buenos Aires Bonds Might Want to Look at th...

Mark Weidemaier & Mitu Gulati

The Province of Buenos Aires (PBA) is about to conclude its much delayed exchange offer. The exchange offer has been revised over and over and has featured many restructuring techniques detested by investors (Pac Man, re-designation, hard-nosed exit consents). But it seems as if the exchange may finally go through.

Rather than write about redesignation or any of the more salient features of the exchange, we want to discuss a more obscure feature, which differs in the two types of bond contracts PBA is offering. (Investors don’t have a choice; those with old bonds (from 2006) get one set of provisions and those with newer bonds (from 2015) get another.) This post is about the different prescription provisions being offered to the two types of bondholders, old and new.

We have been interested in these prescription provisions for a while.  Many moons ago, in the context of Venezuela’s attempt to engage in some restructuring shenanigans using these provisions, we did a couple of posts about prescription clauses in sovereign bonds (here and here). More on the details in the PBA bonds later, but a prescription clause often says something like “claims under the bonds will prescribe,” or “will become void,” unless presented for payment within some period of time. The role these clauses play is uncertain.

One explanation for the prescription clause is that it was designed to protect payment intermediaries. We’ve heard veteran lawyers call the prescription clause the “Belgian dentist clause.” The story being that Belgian dentists would invest in bearer bonds (supposedly good for ducking tax authorities), stick them in a drawer, and forget about them. Payments under the bonds might go uncollected for years. And that was a problem for the payment agents (think Deutsche Bank’s offices in Luxembourg or London), which had money to pay out but no one coming to collect it. The agents didn’t want to be on the hook for paying out these funds for time immemorial. So the prescription clause was supposedly the solution to this problem. It said that after X number of years, unclaimed funds would be sent back to the sovereign and creditors would have to go to Buenos Aires or Quito or wherever to collect. But, and this is a key point, the creditor would still have the right to payment.

Well, for the most part, we no longer have bearer bonds (the tax authorities in the US and Europe finally clamped down). But, strangely, the prescription clauses have not only remained, but mutated. Instead of something like “you have to go to Buenos Aires to collect after two years,” in a subset of sovereign bonds, there now appears language stating that an investor’s claim becomes “void” or “prescribes” after a certain period of time. (As an aside, given that funds today just get transferred into bank accounts that are specified at the outset, the prescription clauses seem especially odd, but whatever…)

In some contracts, the prescription clause has even separated entirely from provisions designed to protect the payment intermediaries. For instance, some Venezuelan bonds have a provision allowing the fiscal agent to return unclaimed money to the issuer after two years, stating that, after this happens, “the holder of such Bond may look only to the Republic for payment.” This clause is in the underlying fiscal agency agreement and disclosed to investors in the prospectus. Separately, the prospectus tells investors that claims not presented for payment within ten years (principal) or three years (interest) will become “void.” We can’t find this language in any of the underlying contracts; a commenter on a prior post told us it is a provision of Venezuelan law. (We don’t know why a provision of Venezuelan law would matter in a New York law bond, but that’s another matter.) Anyway, the example shows just how far the prescription clause—or perhaps “prescription period” would be a better term, to account for possibility that the period could originate in the issuer’s own law—has strayed from its supposed “Belgian dentist” roots.

Anyway, if interpreted to make a claim “void,” the prescription clause is like a super-strength statute of limitations. The statute of limitations makes it hard to sue after the limitations period expires but does not extinguish the claim. Even worse for the unwary creditor, some clauses add even sneakier language to the end of the prescription clause like “except as otherwise provided by the law.” Those words could be taken to mean that the Republic of Argentina or whatever sovereign debtor we are talking about could change its domestic law to say “Claims are extinguished two days after they are due, unless you make your claim within that two day period.” To the extent investors are not paying attention to this obscure clause and think that they only need to worry about the statute of limitation, they could be screwed. Then again, if the prescription period originates in the issuer’s own law and not in the contract—as we are told is the case for the Venezuelan bonds above—then maybe this language simply discloses a risk that is always present…? It is all so confusing.

Why bring this up now? The PBA in its 2021 exchange offer is offering different creditors bonds with different prescription periods. Those holding older bonds from the Kirchner days get one clause, while those holding newer bonds from the Macri days get another. The clauses are disclosed quite prominently, which is itself interesting.

For holders of newer bonds, the prescription period works something like the Venezuelan one noted above. That is, there is a two-year period, after which the trustee or paying agent will (at the issuer’s request) return the money to the issuer. That lets the trustee off the hook to investors, who must then look to the issuer for payment. The issuer remains on the hook for the rest of the prescription period (which is four years from the date payment is due).

For holders of older bonds, it seems to work differently, and also contains some bizarre inconsistencies. The prescription period here seems designed to protect both the trustee and the issuer. Basically, after the period runs, then the trustee (again, on the issuer’s request) returns the money to the issuer. So far, so Belgian dentist. (See, e.g., p. B-2 of the terms and conditions for the 2006 Indenture New Bonds). However, in a separate provision, the prescription period also cuts off investor claims against the issuer (par. 19, p. b-14). Amusingly, the two prescription periods don’t match. We don’t just mean that they don’t match the prescription clause in the newer bonds (although they don’t, as we discuss more below). We mean that the prescription period applicable to the trustee is actually longer, in some cases, than the period applicable to the issuer. The trustee is off the hook after ten years for principal and five for interest. For the issuer it’s 10 years for principal and four years for interest. Although this is probably a drafting error we prefer to think of it as a meta joke about what nonsense these clauses are in the first place.

Oh, yes. The clauses also differ between the securities offered to holders of older and newer bonds. Below are the two clauses.  If readers out there have answers to why these are different and why the difference makes sense, we’d love to know. The emphasis in the excerpts below is ours.

Prescription clause from the 2006 “Kirchner” Indentures (being reissued to one subset of creditors in 2021):

All claims against the Province for payment of principal of or interest on or in respect of the New Bonds shall be prescribed unless made within ten years (in the case of principal) and four years (in the case of interest) from the date on which such payment first became due, or a shorter period if provided by law.

Prescription clause from the 2015 “Macri” Indentures (being reissued to another set of creditors in 2021):

To the extent permitted by law, claims against the Province for the payment of principal of, premium, if any, or interest or other amounts due on, the New Bonds (including Additional Amounts) will become void unless made within four years of the date on which that payment first became due.

There is so much that is interesting here. Version one (2006 Indenture) says that the claims will be “prescribed” after a certain number of years (four for interest and ten for principal). But what does “prescribed” mean?  This is a rather old fashioned word; a concept from property law that seems to relate to matters such as easements and adverse possession. The issuer could argue that “prescribed” means “void,” but that seems a bit of a stretch.

Then there is the bit about [four years] “or a shorter period if provided by law.” Whose law?  The law of the province? The law of Argentina?  If either of those, could those legislatures pass a law reducing the four/ten years to two days?  Literally speaking, the contract seems to allow that. But that’s loony. Yet, there are versions of this prescription clause out there for other sovereigns that are even more explicit in saying this.

Now let us take version two (2015 Indenture). This one no longer has the vague language about claims being “prescribed” after a certain number of years. This version changes that to “void”.  That’s not good for creditors. On the other hand, that terrible language about “or a shorter period if provided by law” is now gone. The issuer might invoke the language “to the extent permitted by law” (again, whose law?)  to argue that it can shorten the prescription period here too. But this language seems to refer to other legal limits on the prescription period itself, not to the law establishing the prescription period.

We remain puzzled about what these clauses are supposed to do or why investors are willing to accept them. There is already a statute of limitations that applies under New York law to contract claims (six years). Why do these bonds even have these prescription clauses anymore? They are just a recipe for mischief.

And if you think that sovereigns won’t engage in this kind of prescription mischief because of reputational constraints, think again. Both Venezuela and Argentina have already gone down this path. (see Anna Szymanski’s Reuters article Rx for Anxiety from earlier this year warning us all to be careful about these clauses).