MercoPress. South Atlantic News Agency

US sides with Argentina in “pari-passu” controversy with defaulted bondholders

Solicitor Blackman: “92% of debt-holders recognized that the sensible thing to do was to take a haircut”

Argentina asked a US federal appeals court to reverse lower-court rulings that could help creditors including Elliott Management Corp.’s NML Capital Fund collect on 1.4 billion dollars in defaulted bonds.

Argentina, which defaulted on 80 billion dollars in foreign debt in 2001, argued that US District Judge Thomas Griesa in Manhattan was wrong in holding that a provision in the bonds bars the Republic from paying bondholders who agreed to debt restructurings in 2005 and 2010 before it pays creditors who refused to take the deals.

“They say this boilerplate clause is a nuclear weapon that gives them the right to veto a sovereign debt restructuring,” Jonathan Blackman, a lawyer representing Argentina, argued to a three-judge panel of the federal appeals court in Manhattan.

Argentina claims that upholding Griesa’s rulings would undermine the debt agreements, trigger a new financial crisis in the republic and make it impossible for countries including Greece and Spain to restructure their debt in the future.

Griesa agreed with the interpretation of NML and the other investors of the so-called pari-passu clause in the bonds providing that Argentina’s obligation to pay “shall at all times rank at least equally with all its other present and future unsecured and unsubordinated external indebtedness.”

He ruled that Argentina’s policy of making payments on restructured bonds issued in 2005 and 2010 exchanges, while refusing to pay anything to the holdout creditors, violates the provision.

Ted Olson, a lawyer for NML, argued that Griesa properly found that Argentina’s refusal to pay the holdouts was, in effect, a subordination of their rights to the bondholders who participated in the restructurings, in violation of the pari passu clause.

“We’re entitled to equal treatment,” Olson told the judges. “We’re not getting equal treatment.”

If successful on the appeal, Olson said NML plans to seek an order finding Argentina in contempt of court should it try to pay holders of the restructured bonds before the holdouts. Investors could pursue US banks and others if they knowingly aid the country in violating the court’s order, he said.

“Argentina, a G-20 nation with more than 46 billion dollars in unrestricted reserves, has ample resources to pay those ‘nonperforming’ obligations just as it now pays its other obligations,” the investors, led by NML Capital, argued in a brief with the federal appeals court in New York. “It simply refuses to do so -- despite years of litigation and the entry of multiple judgments against it.”

Argentina claims the pari passu clause doesn’t prevent it from paying the 92% of bondholders that agreed to exchange their defaulted debt for new bonds. “Ninety-two percent of the debt-holders recognized that the sensible thing to do was to take a haircut,” Blackman told the judges.

The US government, in a separate brief, supported Argentina’s interpretation of the pari passu clause. The US also argued that the Foreign Sovereign Immunities Act, which limits legal actions against foreign governments, bars Griesa from blocking Argentina from paying the holders of the restructured debt before the holdout creditors.

The US said Griesa’s interpretation of the pari passu clause “could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises.”

The US said it has “concerns regarding Argentina’s continued failure to abide by its obligations.” Still, the orders issued by Griesa are “impermissibly broad” and harmful to US foreign relations, the U.S. said in the brief.