The Examiners: Lisa Donahue on Argentina and Distressed Investors

As Argentina finds itself on the verge of a second default, what blame, if any, does the distressed investing community hold?

The real issue at play here isn’t who’s “right” or who’s “wrong,” but whether the appropriate legal and restructuring mechanisms are in place to achieve equitable solutions for all parties in the future without anyone having to go through this type of brinksmanship.

To put it another way:  Is it time to consider expanding the U.S. Bankruptcy Code to more directly address sovereign debt as it already addresses corporate, state and municipal debt?

I cannot claim to know exactly how the Code might be expanded; however, the Argentina case does shine a light on a number of areas where the time-tested learnings from corporate restructurings might well be applied to sovereign restructurings in the future, leading to easier, effective and equitable outcomes. Two critical areas that come to mind are:

• Cramdowns:  Argentina’s “Fiscal Agency Agreement” bonds included a pari passu clause but didn’t include a cramdown clause—all but automatic in non-sovereign-debt issuances in the U.S. Not everyone appreciates cramdowns, of course, but on the other hand, they can be very effective. The potential threat is sometimes the only way a deal gets done.

• Pari passu itself: This case shows that one party’s “equal footing” can sometimes be viewed as another party’s “unfair advantage”—which pretty much describes the spectrum of opinion in the Argentina situation. Whatever your perspective, it’s not a good thing economically, for any party involved, for such disputes to be unresolved for the long term.

There are quite likely to be more sovereign restructurings in the future.  Perhaps it’s time to get a comprehensive process in place?

Lisa Donahue is global leader of the turnaround and restructuring services group at business-advisory firm AlixPartners LLP and is based in New York. Follow her on Twitter at @LisaJDonahue.