No matter how successful the Argentine exchange offer is, there will always be holdouts ? investors that refuse to enter into the exchange in the hope of getting a better deal later. Many investors are worried about these holders of original debt. Will they pose a credible threat of seizing coupon payments on Argentina’s new bonds? If they do, they could keep Argentina in financial purgatory, without access to investment, and with artificially high bond spreads because of the risk of coupon attachment, even though a supermajority of creditors had agreed to a restructuring. Reassuringly, the answer is that the holdout threat is probably not all that credible, although nobody knows for sure.
There is no precedent for Argentina’s situation on the other side of a successful exchange. In the Ecuador, Uruguay, Pakistan and Ukraine cases, holdouts were so few that governments were happy paying them off in full to make them go away. It was a cost-effective solution to a near-term problem ? no-one wants to pay for protracted litigation in a New York court ? but it also set a precedent that is very bad for Argentina. After all, the more that holdouts have been paid off in the past, the more likely it is that they will be in this case as well, and the greater the number of holdouts is likely to be.
Even a small number of holdouts would equate to vast amounts: an exchange with 90% participation would leave more than $10 billion in defaulted debt outstanding. That kind of money can pay for a lot of lawyers, and Argentina wouldn’t find it easy to pay. More important, it is significantly greater than any coupon payments the sovereign will make in the foreseeable future. If coupon payments are diverted to pay judgment creditors, there will be nothing left for the restructured bondholders.
So any exchange is likely to be followed by protracted litigation. Creditors will almost certainly be able to get judgments against Argentina ? bonds are unambiguous contracts that Argentina has unilaterally broken. Indeed, a small number of creditors have won judgments already.
Notorious case
The difficult thing is attaching assets. Argentina has been careful to ensure that it has no attachable assets in foreign countries, which means that creditors are going to be eyeing coupon payments.
In the notorious case of Elliott Associates vs Peru, a New York hedge fund managed to run legal circles around the sovereign, delaying coupon payments and eventually getting paid out in full. The same strategy has been attempted since, in Nicaragua, with noticeably less success, but in any case Argentina’s new bonds will be structured to make a repeat performance as unlikely as possible.
Peru’s Brady bonds, like most debt issued in the 1990s, had a fiscal agent rather than a trustee. Peru sent coupon payments from its central bank to a New York bank that acted as a fiscal agent for the country; that bank, in turn, paid bondholders. The problem was that while the money was briefly in New York, it still belonged to Peru rather than to bondholders, and was therefore attachable by judgment creditors.
Argentina’s new bonds, in contrast, will use the more expensive, but also more secure, trustee system. Argentina will send its coupon payments to a trustee, which represents bondholders rather than the sovereign, and whose funds are therefore at much lower risk of attachment.
Ultimately, the success of any legal strategy will depend, to a large extent, on the jurisdiction in which it is brought, and the individual judge. And when it comes to oral argument, extra-contractual facts like the percentage of bondholders who entered into the exchange become important.
If the exchange is a huge success, judges are likely to have little sympathy for bondholders looking to be paid out in full. On the other hand, if most of Argentina’s debt held abroad is not tendered into the exchange, it will be much harder for the country to portray the holdouts as obstructive vultures.
The tipping point is likely to be around the 80% to 85% level. If more than that proportion accepts the exchange, chances are that holdouts are going to have a hard time. If an exchange goes ahead with a lower take-up, however, holdouts could have a stronger case.
Whatever the outcome of the exchange, Argentine debt is going to have an element of litigation risk for years to come. Investors are simply going to have to live with the fact that some untold number of bondholders still have not been paid, and are trying to get their money back in court.
Unless, that is, Argentina follows the example of Ecuador, Pakistan, Ukraine and Uruguay and pays off holdouts in full.
