Monday, August 26, 2013


Friday was such a great day for financial bloggers that I got so excited, went down stairs to get a drink and try to figure out what topic I should pick, got confused and wrote nothing.  It's happening more and more lately.Huge apologies.  So inasmuch as I still haven't spoken with a few of the players at last weeks movable cocktail parties at Aspen and Jackson hole, I am going to devote today's work to the simply wonderful decision of the 2nd. Circuit in the Argentine Bond case.

The good guys won.  Well, I not sure if you can refer to Vulture Hedge Fund owners as "good guys," but if there is any place one can so do it's when the Argies are on the other side.

You might remember that a few months ago the District Court ruled to uphold the "pari passu" clause in Argentine bond indentures that guaranteed that all creditors would be treated equally in regard to payment of principal and interest, enabling hedge funds that had purchased bonds in the secondary market and had not agreed to discount the principal amount, to collect principal and interest under the original terms.  The Argentines refused to pay, every Tom, Dick and Harry on the international scene, including the IMF, jumped in to wail about the dire consequences of this decision unless it be overturned, and they all lost.  Yea.

What was exceptional in the original decision was the concept that in upholding the pari passu provision, the court also made it clear that any institution that made payments on behalf of Argentina could be held in contempt of the court.  Quite frankly, I didn't expect that ruling but there it was and of course that makes it very difficult for the trustee, which is Bank of New York Mellon to make payments on the restructured obligations, which means the holders will sue the bank if they don't and generations of lawyers will be buying chalets in the Alps for the next 20 years while this thing gets sorted out.  Of course the decision of the 2nd. Circuit to uphold the lower court's ruling will be appealed to the Supremes and in the meantime the decision is stayed (that means nothing gets enforced).  A bold prediction:  The Court will not hear the case.  Rule absolute, as they used to say.  But then where do we go from here?

The Argies continue to be represented by the oft-mentioned Lee Buchheit, as good an attorney as one could find and what lurks in Mr. Buchheit's more than fertile mind in often wondrous to behold.  But one is up against the idea of sanctity of contract which is probably the basis of all commercial law in the country and arguing against that is a mighty task.  Rather, therefore, I would expect future approaches regarding sovereign lending to focus on the nature of the contract and the governing law clause which in recent years has emerged as vitally important in matters of this type as loyal readers will remember in the full discussion on these pages in regard to Greek debt.

Sovereign borrowers will, in the future, demand that all lending agreements contain two things: submission on the part of lenders to local (the borrower's law) and an agreement that the indenture or loan agreement be subject to change upon the vote of the lowest percentage of note holders possible as occurred in certain Greek documents  governed by Greek law both before and after the fact.  One might also remember that the Greeks, despite widespread bets to the contrary, paid in full all obligations governed by English Law.  In the Argentine case, New York Law applied and there was no clause that could have changed the application of pari passu.

Now if you are an international lender, be ye an individual or an institution and concerned with high credit standards, you would have to be out of your mind to agree to borrower demands such as these.  Further, if you were Moody's or a Fitch, you would have to be incompetent to rate any bond with a high investment grade--a AAA rating would be out of the my opinion.  But of course that will not happen as institutional memories are not as long as that of my late, departed Wheaten Terrier, but then she was a very smart dog.  Greed will also enter into the picture.  If the market for obligations of the size and tenor of those being negotiated were...let us say...100 b.p. above Treasuries, the borrower will graciously offer an extra 15 b.p.  What largess!  Bonuses all around!  And no thought that you never make in interest what you lose in principal.  But for the time being the good guys have one and have all of the leverage.  Oddly, and perhaps this is because the enforcement of the decision is stayed, not one regulator anywhere has commented on the state of play, present or future.  And all of this talk about better practices for financial institutions; kinda make you wonder.

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