Bond fight comes down to its worst bonds

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.