A U.S. District Judge dismissed the latest lawsuit filed by Aurelius Capital against Argentina over debt. In January 2019 Aurelius Capital Master Ltd., filed in Manhattan a breach of contract suit against Argentina, related to various U.S. dollar tied, GDP-linked securities issued by the South American country in 2005 and 2010.
Specifically, Aurelius alleged that Argentina failed to make approximately USD 61 million in payments. Argentina filed in response a motion to dismiss and one year later, the motion was granted by US District Judge of the Southern District of NY, Loretta A. Preska.
As described by the Judge in her ruling, dated January 2020, the story of the Argentine financial crisis is familiar to that Court. In 2001 with the moratorium of Argentina’s debt service payments, endless rounds of litigation relating to unpaid amounts on the distressed debt spurred. And in 2005 and 2010, Argentina launched these voluntary debt exchanges whereby owners of the country’s defaulted debt could exchange their non-performing bonds for new securities, which were coupled with GPD-linked securities that provided for contingent additional payments to bondholders made yearly through 2035, based on the performance of Argentina economy.
In a nutshell, as part of the negotiation of previous default, Argentina issued securities that would trigger a higher payment if GDP, or GDP growth, exceeded a certain amount. Aurelius claims that Argentina’s growth exceeded this trigger in 2013, although the country claimed it did not.
Accordingly, the Judge makes clear that the center of the dispute is a Byzantine mathematical calculation set forth in the documents governing the securities that determines whether Argentina’s payment obligations for a given year are triggered. Stripped down to the studs, explained the Judge, this is a dispute about contractual interpretation, as the parties disagree as to how the core machinery of that equation is meant to function under the agreed terms.
As per Loretta A. Preska, the relevant contractual terms clearly indicate that the calculations material to Aurelius’s breach of contract must rely on enumerated economic metrics produced by the Argentine government. However, Aurelius, rested its claim on data not contemplated by the plain terms of the contract and argued in favor of a contractual interpretation allowing the use of alternative statistics.
In fact, as INDEC ceased publishing as of 2014 the Actual Real GDP in constant 1993 prices (metric agreed by the parties on the controlling documents), Aurelius used the EMAE index also published by the INDEC to calculate if Argentina’s payment obligations were triggered in 2013. Argentina explained that INDEC decided to replace its calculation of real GDP in constant 1993 prices and that effective 2014 it would base it in constant 2004 prices, so the data needed was no longer available.
In Preska’s opinion, unfortunately for Aurelius, there is no theory of “second best” when it comes to express contractual terms. The terms ruling the securities unequivocally state that the defined term Actual Real GDP refers to a version of Argentina’s GDP that is published by INDEC. The Hedge could have bargained for a contract that required the use of the specific metrics “or the closest equivalent” for example, a language that provided flexibility where INDEC fails to publish the Actual Real GDP data, but it did not. Therefore, in Preska’s words, the hedge is stuck with the enumerated metrics. The Hedge cannot base its claim using alternate statistics not contractually contemplated.
However, the Judge did leave a door open for Aurelius, explaining that it cannot be ignored that Argentina decided to rebase its GDP, eliminating GDP necessary data contemplated in the binding contractual terms agreed between the parties, without more and thus, the hedge was forced to rely on an extra-contractual calculation method because of Argentina’s own actions.
For this reason, Preska granted to Argentina the motion to dismiss the hedge’s complaint without prejudice, since the contractual plain terms cannot be ignored, but the Judge also concluded that Aurelius may file an amended complaint, by no later than February 8. 2020, which means that the legal war is not over regarding this matter.
The Hedge will certainly amend its complaint and possibly try to prove bad faith. It must be underlined that Aurelius did not even assert on its lawsuit that Argentina rebased its GDP in a manner intentioned to avoid triggering its payment obligations, but it will probably do so next time.