Bond fight comes down to its worst bonds

The Pak Banker - - OPINION - Matt Levine

WE'VE talked a lot about Ar­gentina's sov­er­eign-debt saga, but now that it is per­haps draw­ing to a close I'd like to tell the story again, from a slightly dif­fer­ent per­spec­tive. (If you want it from the reg­u­lar per­spec­tive, you know where to go.) This ver­sion of the story starts in 1998, when Ar­gentina is­sued some bonds called float­ing rate ac­crual notes. The FRANs were due in 2005, and their float­ing in­ter­est rate was based on the mar­ket yields of other, fixe­drate Ar­gen­tine debt. The idea was that if Ar­gentina's credit de­te­ri­o­rated, hold­ers of th­ese bonds would be com­pen­sated in the form of a higher in­ter­est rate. This sounds like a sen­si­ble enough idea. It was a ter­ri­ble, ter­ri­ble idea.

Ar­gentina's credit de­te­ri­o­rated. It de­faulted on its bonds in 2001. In one ob­vi­ous way, this was bad for the FRAN hold­ers: They stopped get­ting paid. But in an­other, much more the­o­ret­i­cal way, it was great for the FRAN hold­ers: The in­ter­est rate on their bonds, which was meant to re­flect the risk of Ar­gentina's sov­er­eign credit, went up as Ar­gentina ap­proached and then tipped into de­fault. At one point, just be­fore the 2005 ma­tu­rity of the FRANs, the hold­ers were sup­posed to get paid an as­ton­ish­ing 101 per­cent per year. Of course, they were ac­tu­ally get­ting paid noth­ing, so this did them no im­me­di­ate good. But there they were, with a doc­u­ment say­ing they were sup­posed to get 101 per­cent a year. Re­mem­ber that doc­u­ment, which has Chekho­vian sig­nif­i­cance in this story.

Any­way, the FRANS' ma­tu­rity date came and went in 2005, Ar­gentina stopped cal­cu­lat­ing in­ter­est on them, and still no one was get- ting paid. Ar­gentina made an ex­change of­fer for its bonds, of­fer­ing hold­ers a swap into new bonds at about 30 cents on the dol­lar. Many hold­ers ac­cepted this of­fer, or a later one in 2010; many hold­ers, in­clud­ing hold­ers of about $300 mil­lion worth of FRANs, did not.The hold­ers who ac­cepted the of­fer got shiny new bonds that paid in­ter­est (for a while). The hold­ers who didn't -- the hold­outs -- got noth­ing (for a while).

But the hold­outs were still out there, nurs­ing griev­ances, gath­er­ing strength, con­sid­er­ing op­tions. One op­tion was, of course, to sue. They sued. Specif­i­cally, NML Cap­i­tal, a unit of Paul Singer's El­liott Man­age­ment, "ac­cel­er­ated the ma­tu­rity of $32 mil­lion of the $102 mil­lion in FRANs prin­ci­pal that it had pur­chased on the sec­ondary mar­ket," and sued in a New York fed­eral court for a judg­ment on those $32 mil­lion of FRANs. NML ar­gued to the court that, af­ter Ar­gentina stopped cal­cu­lat­ing in­ter­est on the FRANs in 2005, the FRANs were doomed to walk the earth pay­ing 101 per­cent in­ter­est, the last rate any­one had both­ered to cal­cu­late, un­til they were paid off. Ar­gentina ar­gued, ba­si­cally, that that was un­fair. (Be­cause, you know, 101 per­cent in­ter­est is a lot.) The judge in the case was U.S. District Judge Thomas Griesa, who was in the process of get­ting very sick of Ar­gentina in­deed, and he wasn't par­tic­u­larly amused by Ar­gentina's fair­ness ar­gu­ments. He ruled for NML, var­i­ous ap­peals courts agreed, and ul­ti­mately NML got a judg­ment for $311.2 mil­lion in Oc­to­ber 2011.

You will no­tice that $311.2 mil­lion is quite a lot more than $32 mil­lion. That's what 101 per­cent in­ter­est will do for you. But su­ing turned out, for NML, to have two big prob­lems. One was that Ar­gentina wasn't pay­ing the hold­out bond­hold­ers in 2011 any more than it was in 2001, so NML's judg­ment didn't re­sult in any ac­tual money. The other, smaller prob­lem was that, af­ter the ef­fec­tive date of NML's judg­ment (2009, rather than 2011, be­cause of all the ap­peals), it ac­crued in­ter­est at only about 0.5 per­cent a year. With post­judg­ment in­ter­est, NML's judg­ment should now be worth about $321.7 mil­lion, which on the one hand is just a bit more than 10 times as much as the orig­i­nal prin­ci­pal amount of the FRANs, but which on the other hand is barely more than it was back in 2011 (or 2009), and not much com­pen­sa­tion for the risk and heartache of wait­ing all th­ese ex­tra years.

But NML had an­other plan. Its other plan -- I mean, you know it by now, right? We have talked about it a lot. The barest gist of it is that NML, and some other hold­out cred­i­tors, sued not for a money judg­ment on their bonds, but rather for en­force­ment of the "pari passu" clause in those bonds. In this clause, Ar­gentina had promised to treat its pre-2001 bonds -in­clud­ing the FRANs -- equally with all of its other bonds. NML in­ter­preted this to mean that, if Ar­gentina wasn't pay­ing the FRANs, it couldn't pay any of the new, post-2005 ex­change bonds, which it had been pay­ing, and which it wanted to keep pay­ing to re-es­tab­lish its in­ter­na­tional cred­i­bil­ity and gain ac­cess to the in­ter­na­tional cap­i­tal mar­kets.

This was a rather rad­i­cal in­ter­pre­ta­tion of the clause, but NML con­vinced Judge Griesa, and ul­ti­mately the U.S. Supreme Court, that it was right. This was im­por­tant be­cause, while Ar­gentina could ig­nore an or­der from Judge Griesa to pay NML $311.2 mil­lion, or what­ever, it couldn'tig­nore Judge Griesa's or­der not to pay its ex­change bond­hold­ers. Be­lieve me, it tried.

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