By Marcos Vergara del Carril
In what the Financial Times has called “the sovereign debt restructuring case of the century,” Argentina has timely submitted its proposal as requested by the U.S. Court of Appeals for the Second Circuit, with which it is willing to make payments on approximately $1.3 billion of unpaid debt obligations that stem from the country’s $95 billion debt default of December 2001.
The case is getting closer to completing its more than 10-year marathon in the courts of New York, in a long battle between the Republic of Argentina and NML Capital Ltd., a fund affiliate of the hedge fund firm Elliott Associates. As said in our previous blog entry (click here), NML, based in the Cayman Islands, is seeking to repeat its landmark victory when it won a case against Peru in the 1990s, recovering approximately 400% what it paid for Peru’s debt.
Argentina’s proposal almost mimics the terms and conditions of the 2010 debt exchange, and requests the court to support this “cram down,” claiming that, if rejected, Argentina will be forced to reopen the entire debt restructuring, which has already been accepted by creditors holding 93% of the debt (Argentina agreed to exchange defaulted bonds with restructured debt obligations initially paying bondholders approximately thirty cents on the dollar).
Under the proposal, the par option is intended for smaller investors (less than $50,000). It would give bondholders new bonds due in 2038 with a nominal face amount equal to the amount of their defaulted debt, plus unpaid interest up to the end of 2001. The bonds would pay interest (from 2.5% to 5.25% annually) over the life of the bonds. Past due interests would be paid in cash.
On the other hand, the discount option would give holdouts bonds due in 2033 for 34% of the defaulted amount, with an 8.28% annual rate. Creditors would be compensated for past due interest on the restructured bonds with new bonds due in 2017 that pays 8.75% annually (Bono Global 2017).
Both par and discount options are supplemented with securities that are tied to Argentina’s GDP growth.
It is expected that by the end of April the court will reach its decision. Stakes are high for both Argentina and future sovereign debt restructurings. That is the main reason why the Federal Bank Reserve of New York, the American Bankers Association, and the U.S. Attorney General’s office favored Argentina’s position. The latter argued that "by unduly restricting the immunity afforded to foreign state property, the decision not only contradicts this Court’s precedent, but could adversely affect U.S. foreign relations and threaten U.S. government assets…The panel in this case adopted a novel interpretation of a standard pari passu clause found in many sovereign-debt instruments, in a manner that runs counter to longstanding U.S. efforts to promote orderly restructuring of sovereign debt.”