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INTERNATIONAL INSOLVENCY INSTITUTESixteenth Annual International Insolvency ConferenceTokyo, Japan III NextGen Leadership Program and Class V Inductionproblems and lessons of the argentine sovereign debt crisisByFernando Daniel HernándezMarval, O’ Farrell & MairalBuenos AiresJune 6-7, 2016?International Insolvency Institute 2016. All rights reserved.Problems and Lessons of the Argentine Sovereign Debt CrisisBy Fernando Daniel HernándezI.-The Argentine 2000’s crisis.In 1989/1990 Argentina was affected by a hyperinflation process that ended with a monthly inflation of more than 200%, that put the country at the edge of collapse causing capital flight, annihilation of middle-class savings and riots. In 1991, a new recently elected administration put an end to this situation by virtually dollarizing the Argentine economy through the enactment of the Law No. 23,928, or the “Convertibility Law”, which pegged the Argentine Peso to the United States Dollars establishing a fixed exchange rate of USD1:Ps.1, and this parity backed one to one by foreign federal reserves. This measure, along with the privatization of the Argentine Oil Company (Yacimientos Petrolíferos Fiscales S.A.), the Argentine National Airline (Aerolíneas Argentinas S.A.), and public services and utilities, caused confidence and optimism among investors that during the following years poured capital into Argentina helping to lower the inflation rate to one digit by 1993. However, by the end of the 1990’s a diversity of external and internal factors, including the downturn of capital flows into Latin America and the lack of an integrated economic and fiscal plan, provoked an increase of inflation and sharp appreciation of the Argentine Peso. As consequence, a strong loss of the Argentine economy’s competitiveness reduced the country’s exports and increased the imports affecting the domestic production and sale of goods and services both to the international and domestic markets in all industries. In addition, an increasing flow of capital out of the country highly reduced the country’s foreign reserves and availability of Dollars in the economy and a dollarized banking system begin to face liquidity problems. Even though not the only factor of the crisis, the distortion of the foreign exchange rate provoked by the Convertibility Law with the creation of a fixed foreign exchange-rate regime is largely one of the main factors causing the crisis and, mainly, impeding Argentina to adjust the strong exchange rate lag provoked by increasing inflation. “While it is impossible to prove that Argentina’s exports would have performed much better under a flexible exchange rate arrangement once trade was liberalized, it is striking that other countries that have undergone major trade liberalizations and were considerably more successful in boosting export shares (such as, Spain in the mid-1970s, Chile during the 1970s and 1980s, and Turkey in the early 1980s) have done so in the context of a depreciating real exchange rate.” As consequence, by the 2000’s Argentina was facing its largest and deepest systemic economic and financial crisis in its history and in 2001 announced the default of more than USD132 billion of federal sovereign debt. II.-The restructuring offers.The First Offer.The Exchange Offer.It was only after more than 36 months from the default that Argentina made its first restructuring offer. In December 9, 2004 the Executive Branch of the Argentine Republic issued Decree No. 1735/2004, approving the first offer (the “First Offer”). The First Offer was launched on January 14, 2005 to voluntarily restructure more than USD81.8 billion of sovereign foreign debt (comprising USD79.7 billion in principal and USD2.1 billion in interest accrued and unpaid as of December 31, 2001) represented by more than 150 securities issued in several currencies, jurisdictions and subject to different applicable laws (the “Defaulted Securities”).The First Offer consisted in a menu of new securities including Par Bonds due December 2038 (“Pars”), Discount Bonds due December 2033 (“Discounts”), Quasi-Par Bonds due December 2045 (“Quasi-Pars”) and GDP-Linked Securities with expiration in December 2035 (“GDP-Linked Securities”, together with the Pars, Discounts, Quasi-Pars, the “New Securities”).The principal amount outstanding and interest accrued and unpaid as of December 31, 2001 (the “Eligible Amount”) on all Defaulted Securities, other than the par and discount bonds issued by Argentina in the late 1980’s under the Brady Plan (the “Brady Bonds”) were exchangeable for Pars, Discounts and Quasi-Pars in a principal amount equal to the following portion of the Eligible Amount (assuming denominated in the same currency): Pars, 100%, Discounts, 33.7% and Quasi-Pars, 69.9%.The following chart summarizes the exchange alternatives available:In addition to the Pars, Discounts or Quasi-Pars elected, each holder participating in the restructuring received GDP-Linked Securities in a notional amount equal to the Eligible Amount accepted by Argentina in the tender. For example, for each USD1 in principal amount of Discounts received, the holder also received USD2.00 in notional amount of GDP-Linked Securities (2.96735905 = 1/0.337, rounded downward to the nearest 1 unit). These securities represent the right to receive certain payments that are contingent upon and determined on the basis of the performance of Argentina’s gross domestic product. Accordingly, the GDP-Linked Securities represent a theoretical number to allocate payments among the holders of the GDP-Linked Securities. The GDP-Linked Securities were issued as a single unit with the corresponding New Security, but after 180 days they detached and begin to trade independently. The Brady Bonds were secured by US Treasury Bonds (in respect of Brady Bonds denominated in United States Dollars) or bonds issued by the German’s development bank (in respect of Brady Bonds issued in Euros) (the “Brady Collateral”). Accordingly, the holders of Brady Bonds tendered received a portion of cash (corresponding to the cash proceeds resulting from the release of the Brady Collateral and redemption of the securities constituting such Brady Collateral) and Discounts in a principal amount equal to 33.7% of the Brady Bonds principal amount outstanding less the cash payment The New Securities.All principal amounts under the New Securities, other than the GDP-Linked Securities, are paid at maturity and interests accrue on a semi-annual basis since December 31, 2003.The New Securities are subject to mandatory re-purchase for excess cash and excess GDP. In addition, all Pars, Discounts and Quasi-Pars denominated in Pesos are adjusted for inflation based on a coefficient measured by changes in the consumer price index.As an incentive to participate in the First Offer, the New Securities include a “Right Upon Future Offers” (the “RUFO Clause”) covenant by which if on or before December 31, 2014 Argentina makes an offer to the outstanding Defaulted Securities not tendered in the First Offer, then the holders of the New Securities will have the right to exchange their New Securities for the consideration offered by Argentina in such new offer. The RUFO clause constitutes a “reserve matter” under the trust indenture for the New Securities.Any amendment, modification, supplement or waiver to the New Securities must be given at a meeting of the holders of the New Securities called by the Republic of Argentina or the trustee by notices published with an anticipation of not less than 30 days and not more than 60 days prior to the fixed date of the meeting. In addition, upon an event of default, holders of at least 10% of the aggregate principal amount outstanding of the New Securities may ask the trustee to call a meeting of holders to consider the actions to be taken. Except where the matter to be considered at the meeting is a Reserved Matter (as defined below), at any meeting of the holders of the New Securities, a majority in aggregate principal amount outstanding of the New Securities will constitute a quorum in first call and 25% in aggregate principal amount outstanding will constitute a quorum in any meeting adjourned in second call for lack of quorum. At any meeting called to consider any Reserved Matter (as defined below) holders of the New Securities representing 75% of the aggregate principal amount outstanding will constitute a quorum. Any modification, amendment, supplement or waiver to the New Securities may be given pursuant to a written action of the holders of the applicable series without need for a meeting or by vote at a meeting of holders. Any modification, amendment, supplement or waiver to the New Securities of a single series, or to the indenture insofar it affects all New Securities under the indenture may be generally made, and future compliance therewith waived, with the consent of Argentina and holders thereof representing not less than 662/3 of the aggregate principal amount outstanding of the applicable New Securities.However, any modification, amendment, supplement or waiver relating to, among other things, the change of the maturity date; the reduction of the principal amount; the change of the currency; the change of the governing law and jurisdiction; an exchange offer amend any event of default; the authorization to the trustee, on behalf of all holders of the New Securities of a series, to exchange or substitute all the New Securities of that series for, or convert all the New Securities of that series into, other obligations or securities of Argentina or any other person; and the amendment or change of the RUFO Clause (each, a “Reserve Matter”) is subject to approval by a special majority. Any Reserve Matter affecting any single series of the New Securities or the indenture, insofar as it affects all series of the New Securities thereunder, may be made, and future compliance waived, with the consent of Argentina and holders of not less than 75% of the aggregate principal amount outstanding of the applicable New Securities.If Argentina proposes any Reserve Matter to two or more series, or to the indenture, insofar as it affects two or more series of the New Securities, in either case as part of a single transaction, Argentina may elect to proceed to make such modification, or waive such future compliance, for all affected series of the New Securities if made with the consent of Argentina and:the holders of not less than 85% in aggregate principal amount of the outstanding New Securities of all series affected (taken in aggregate), andthe holders of not less than 662/3 in aggregate principal amount of the outstanding New Securities of each applicable series (taken individually).Any modification consented or approved by the holders of New Securities of one or more series in accordance with the foregoing provisions will be conclusive and binding on all holders of the New Securities of the applicable series, whether or not they have given such consent or were present at the meeting of holders at which such action was taken, and on all future holders of the New Securities of that series whether or not notation of such modification is made upon the New Securities of that series. Therefore, a new important feature of the New Securities is the inclusion of this collective action clause. This new feature in the securities highly reduces the chances of a “holdout” litigation like this can occur again in the future.The Lock Law (Ley Cerrojo).In an attempt to pressure holders of the Defaulted Securities to participate in the First Offer, in addition to the RUFO Clause, the Argentine Republic adopted two measures.First: the prospectus for the offer stated that “[e]ligible Securities not exchanged pursuant to the Offer will remain outstanding. Argentina has announced that it has no intention of resuming payments on any Eligible Securities that remain outstanding following the expiration of the Offer”Second: on February 9, 2005 the Argentine Congress passed the Law No. 26,017, or the “Lock Law”, by which, with respect to all Defaulted Securities not tendered in the First Offer: (i) prohibited the Argentine Government from reopening any additional exchanges after expiration of the First Offer (which occurred on February 25, 2005); (ii) prohibited the Argentine Government from conducting any type of in-court, out-of-court or private settlement; and (iii) required the Argentine Government to remove all Defaulted Securities from listing on all domestic and foreign markets and exchanges. The result of the First Offer.Upon expiration of the First Offer, holders of an aggregate of approximately USD62.3 billion, representing 76.15% of the aggregate amount of the Defaulted Securities tendered their Defaulted Securities in exchange for the New Securities. The Second Offer.The Exchange Offer.In November 18, 2009, the Argentine Congress passed the Law No. 26.547, by which suspended the effects of the Lock Law until December 31, 2010, and authorized the Argentine Government to re-launch the offer to restructure the Defaulted Securities outstanding; provided that the financial terms and conditions offered to the remaining holders of the Defaulted Securities shall not be equal to, nor better, to those offered under the First Offer.According to the foregoing, in April 26, 2010 the Executive Branch of the Argentine Republic issued Decree No. 563/2010, approving the second offer since the default (the “Second Offer”, and together with the First Offer, the “Restructuring Offers”). The Second Offer offered holders of Defaulted Securities not tendered in the First Offer and holders of the New Securities exchanged in the First Offer (the “Eligible Securities”) to exchange their Eligible Securities for a menu of discount and par bonds (the “Additional New Securities”, and together with the New Securities, the “Restructured Securities”).In general terms, as compared to the New Securities, the Additional New Securities have longer maturities, lower interest rates, and in respect of those exchanged for Defaulted Securities, are not entitled to interest accrued after December 31, 2001. In addition, in almost all cases the principal amount of the Additional New Securities received in the Second Offer is less than the principal amount of the New Securities delivered in respect of the same amount of Defaulted Securities in the First Offer.The following charts summarize the exchange alternatives available to the holders of the Defaulted Securities and the New Securities:The result of the Second Offer.Upon expiration of the Second Offer, holders of an aggregate of approximately 92.4% of the aggregate amount of the Defaulted Securities restructured their Defaulted Securities in First Offer and the Second Offer for the Restructured Securities. III.-The claims.The claim.In 2011 a portion of holders of Defaulted Bonds issued by the Republic of Argentina under a certain 1994 Fiscal Agency Agreement (the “FAA”, and the Defaulted Bonds issued thereunder, the “FAA Bonds”) who have obtained money judgments against the Republic of Argentina that were not able to collect leaded by NML Capital, LLC (the “Lead Plaintiffs”) filed a motion before the United States District Court for the Southern District of New York (the “US District Court”) (NML Capital, LLC against the Republic of Argentina) seeking partial summary judgment declaring that the Republic of Argentina had violated the FAA “pari passu clause” (the “Pari Passu Clause”).Section 1(c) of the FAA provides that, “[t]he Securities will constitute… direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness…”Lead Plaintiffs claimed that the Republic of Argentina violated the FAA Bonds’ Pari Passu Clause by creating a class of creditors who are guaranteed payment while formally condemning Lead Plaintiffs to a lower rank, which is barred from receiving any payment at all. They claimed that upon issuance of the Restructured Securities the Argentine Government created new unsecured and unsubordinated sovereign debt on which has satisfied all payments that became due while suspended all payments on the FAA Bonds. By Order issued on December 7, 2011, the US District Court admitted the motion and declared that: “…the Republic is required under Paragraph 1(c) of the FAA at all times to rank its payment obligations pursuant to NML’s Bonds at least equally with all the Republic’s other present and future unsecured and unsubordinated External Indebtedness… that the Republic’s payment obligations on the bonds include its payment obligations to bondholders who have brought actions to recover on their defaulted bonds, and on judgments entered pursuant to judicial action brought by bondholders… that the Republic violates Paragraph 1(c) of the FAA whenever it lowers the rank of its payment obligations under NML’s Bonds below that of any other present or future unsecured and unsubordinated External Indebtedness, including (and without limitation) by relegating NML’s bonds to a non-paying class by failing to pay the obligations currently due under NML’s Bonds while at the same time making payments currently due to holders of other unsecured and unsubordinated External Indebtedness or by legislative enactment… that the Republic lowered the rank of NML’s bonds in violation of Paragraph 1(c) of the FAA when it made payments currently due under the Exchange Bonds, while persisting in its refusal to satisfy its payment obligations currently due under NML’s Bonds... that the Republic lowered the rank of NML's bonds in violation of Paragraph l(c) of the FAA when it enacted Law 26,017 and Law 26,547… that the aforesaid laws were in direct violation of the right of NML under the FAA and the bond agreements to bring a legal action in court to recover on the defaulted bonds…” (the “December 7, 2011 Order”).Upon the December 7, 2011 Order, Lead Plaintiffs filed a motion for equitable relief as remedy for such violations. On February 23, 2012 the District Court found that there is no adequate relief and remedy at law for the Argentine Republic’s violations under the FAA “because the Republic has made clear… its intention to defy any money judgment issued by this Court…[and] Because the Republic has the financial wherewithal to meet its commitment of providing equal treatment to both NML (and similarly situated creditors) and those owed under the terms of the Exchange Bonds, it is equitable to require it to do so. Indeed, equitable relief is particularly appropriate here, given that the Republic has engaged in an unprecedented, systematic scheme of making payments on other external indebtedness…“; and therefore, ordered that (i) whenever the Argentine Republic makes any payment under the Restructured Securities, or any securities replacing them, occurring in the future, the Argentine Republic “shall concurrently or in advance make a “Ratable Payment” to the Lead Plaintiffs; (ii) that the Argentine Republic is enjoined from making any payments under the Restructured Securities without complying with this ‘Ratable Payment’; and (iii) that all parties involved, directly or indirectly, in advising upon, preparing, processing, or facilitating any payment under the Restructured Securities (the “Agents and Participants”) must be given notice of this Order. Finally, the Order “permanently PROHIBITED [the Argentine Republic] from taking action to evade the directives of this ORDER, render it ineffective, or to take any steps to diminish the Court's ability to supervise compliance with the ORDER, including, but not limited to, altering or amending the processes or specific transfer mechanisms by which it makes payments on the Exchange Bonds, without obtaining prior approval of the Court” (the “February 23, 2012 Order”).Upon the appeal of the February 23, 2012 Order by the Argentine Republic, on March 5, 2012 the District Court ordered a stay of such Order until the US Court of Appeals for the Second Circuit (the “Court of Appeals”) issues its mandate disposing of the appeal and, to secure the Lead Plaintiffs’ rights during the pendency of the appeal, ordered that the Argentine Republic do not, during the pendency of the appeal, take any action to evade the February 23, 2012 Order or render it ineffective, in the event they are affirmed, including without limitation, altering or amending the processes or specific transfer mechanisms by which it makes payments on the Restructured Securities (the “March 5, 2012 Stay”).In its decision dated October 26, 2012, the Court of Appeals found that “”In New York, a bond is a contract…”… [and the] specific constraint on Argentina as payor makes good sense in the context of sovereign debt: When sovereigns default they do not enter bankruptcy proceedings where the legal rank of debt determines the order in which creditors will be paid. Instead, sovereigns can choose for themselves the order in which creditors will be paid. In this context, the Equal Treatment Provision prevents Argentina as payor from discriminating against the FAA Bonds in favour of other unsubordinated, foreign bonds“. The Court of Appeals also found that “[i]t is highly unlikely that in the future sovereigns will find themselves in Argentina’s predicament. Collective action clauses – which effectively eliminate the possibility of “holdout” litigation– have been included in 99% of the aggregate value of New York-law bonds issued since January 2005, including Argentina’s 2005 and 2010 Exchange Bonds. Only 5 of 211 issuances under New York law during that period did not include collective action clauses, and all of those issuances came from a single nation, Jamaica. Moreover, none of the bonds issued by Greece, Portugal, or Spain – nations identified by Argentina as the next in line for restructuring – are governed by New York law “ (the “Court of Appeals’ October 26, 2012 Decision”) The Court of Appeals had little difficulty founding that the Argentine Republic had breached the Pari-Passu Clause of the FAA and therefore affirmed the District Court’s February 23, 2012 Order, but remanded the case to the District Court for clarification of the operation of the payment formula and the injunctions’ application to third parties and intermediary banks.On November 21, 2012, the District Court made clear that the questions posed to it by the Court of Appeals did not affect the basic ruling that there can be no payments by the Argentine Republic under the Restructured Securities without an appropriate payment to the Lead Plaintiffs. Even though under ordinary circumstances the March 5, 2012 Stay would be left in effect, upon the Argentine Republic President and high officials undisputed public declarations after the Court of Appeals’ October 26, 2012 Decision stating that Argentina will not obey the District Court’s rulings, by November 21, 2012 Order the District Court vacated the February 23, 2012 Order and amended it. Since the Court of Appeals had not issued a final decision yet, the amended February 23, 2012 Order ordered that all payments under the Restructured Securities to be made (including interest payments due on December 15, 2012), must be made into an escrow account, so any adjustments made by the Court of Appeals’ final decision can be made (the “Amended February 23, 2012 Order”). In addition, the Amended February 23, 2012 Order re-defined the participants that are bound by the terms of this Order and prohibited from aiding and abetting any violation of the Order. Also, on November 21, 2012, on remand by the Court of Appeals requesting for clarifications on the payment formula and effects of the February 23, 2012 Order on third parties, the District Court issued an Order stating that:Payment Formula:“The obligation to plaintiffs under the February 23, 2012 Injunctions accrues whenever Argentina “pays any amount due” under the terms of the Exchange Bonds… When this occurs, Argentina will be required to make a “Ratable Payment” to plaintiffs. Assuming that Argentina pays 100% of what is then due on the Exchange Bonds, this is the “Payment Percentage” referred to in paragraph 2(b). Argentina would be required to pay 100% “multiplied by the total amount currently due” to plaintiffs. There is no question about what is “currently due” to plaintiffs. The amount that is currently due is the amount of the unpaid principal, the due date of which has been accelerated, and accrued interest. This is in accord with the first hypothetical situation posed in the Court of Appeals’ opinion, describing the situation in which Argentina owes the holders of restructured debt $100,000 in interest and pays 100% of that amount, resulting in the requirement to pay plaintiffs 100% of the accelerated principal plus all accrued interest… Also, the Payment Percentage is calculated on the basis of “the amount actually paid or which the Republic intends to pay,” as a percentage of “the total amount then due.”... To recapitulate, the Ratable Payment provisions in the Injunctions, as correctly interpreted and as intended by the court, would be currently applied as follows. In December 2012, there are interest payments of approximately $3.14 billion due on the Exchange Bonds. Presumably, Argentina intends to pay 100% of what is owed. There are currently debts owed to plaintiffs by Argentina of approximately $1.33 billion… In order to comply with the terms of the Injunctions, Argentina must pay plaintiffs 100% of that $1.33 billion concurrently with or in advance of the payments on the Exchange Bonds.”Third Parties: “… Rule 65(d) of the Federal Rules of Civil Procedure… provides that an injunction binds the parties, the parties’ agents, and other persons who are in active concert or participation with the parties or their agents. It is further provided that an injunction binds these people only if they receive actual notice of the injunction… [I]f Argentina is able to make the payments on the Exchange Bonds without making the payments to plaintiffs, the District Court and Court of Appeals’ rulings and the Injunctions will be entirely for naught. To avoid this, it is necessary that the process for making payments on the Exchange Bonds be covered by the Injunctions, and that the parties participating in that process be so covered… The process and the parties involved in making payments on the Exchange Bonds are as follows. Argentina transfers funds to the Bank of New York Mellon (“BNY”), which is the indenture trustee in a Trust Indenture of 2005 [(there is apparently a dispute as to whether this payment takes place in Argentina or the United States. However, BNY is surely a United States entity. The rest of the process, without question takes place in the United States.)] Plaintiffs assert that under Rule 65(d), the Injunctions should bind Argentina, the indenture trustee, the registered owners, and the clearing system, whoever they are… BNY then forwards the funds to the “registered owner” of the Exchange Bonds. There are two registered owners for the 2005 and 2010 Exchange Bonds. One is Cede & Co. and the other is the Bank of New York Depositary (“BNY Depositary”). Cede and BNY Depositary transfer the funds to a “clearing system” such as the Depository Trust Company (“DTC”). The funds are then deposited into financial institutions, apparently banks, which then transfer the funds to their customers who are the beneficial interest holders of the bonds. It is probably true that these parties are not all agents of Argentina, but they surely are “in active concert or participation” with Argentina in processing the payments from Argentina to the exchange bondholders. There is a problem under Article 4A of the U.C.C. about including intermediary banks. But plaintiffs address this in seeking a carve-out in the Injunctions for such intermediary banks. Plaintiffs are also not requesting that the financial institutions receiving funds from the DTC be bound by the Injunctions. It would appear that plaintiffs have requested that a reasonable set of parties be bound by the Injunctions, and this is in compliance with Rule 65(d). BNY, and to some extent others on the above list, object to any application of Rule 65(d) to them. Particularly BNY strenuously asserts that it has duties as indenture trustee, and these duties should be the beginning and the end of its responsibilities. These arguments miss the point. If Argentina complies with the rulings of the Court of Appeals, there will be no problem about funds destined for exchange bondholders being deposited with BNY and going up the chain until they arrive in the hands of such bondholders. But if Argentina attempts to make payments to the exchange bondholders, contrary to the ruling of the Court of Appeals and thus contrary to law, this would not involve the normal and proper situation dealt with by BNY under the indenture, and dealt with by others in the chain. Under these circumstances, these third parties should properly be held responsible for making sure that their actions are not steps to carry out a law violation, and they should avoid taking such steps.” On November 28, 2012 the Court of Appeals ordered the stay of all District Court’s Amended February 23, 2012 Order pending further order of the Court of Appeals. And on August 23, 2013 the Court of Appeals affirmed the District Court’s Amended February 23, 2012 Order and stayed enforcement pending the resolution by the Supreme Court of a timely petition for a writ of certiorari. On September 11, 2013 the Argentine Congress passed Law No. 26,886 approving the re-opening of a third offer to the holders of the Defaulted Securities, provided that such holders could not be offered better conditions than those offered in the Second Offer. However, the third offer was never launched. On October 3, 2013 the District Court declared that the March 5, 2012 Stay remains continuously in full force and effect, which order was appealed by the Argentine Republic on October 15, 2013.The Argentine Republic filed a petition for writ of certiorari on February 18, 2014 to certify to the Court of Appeals (i) whether a foreign sovereign is in breach of a pari passu clause when it makes periodic interest payments on performing debt without also paying on its defaulted debt; and (ii) whether a District Court can enter an injunction coercing a foreign sovereign into paying money damages, without regard to whether payment would be made with assets that the FSIA makes immune from attachment arrest and execution. The Supreme Court of the United States denied the petition on June 16, 2014 and, accordingly, on June 18, 2014 the Court of Appeals lifted the stay of enforcement of the Amended February 23, 2012 Order injunction.On June 20, 2014, in response to a declaration of the Minister of Economy of Argentina proposing that Argentina would offer an exchange of the Restructured Securities for new securities payable in Argentina under Argentine law, the District Court ordered that such proposed exchange “is in violation of the rulings and procedures now in place in the Southern District of New York, and the Republic of Argentina is prohibited from carrying out the proposal of the Economy Minister”. And immediately thereafter appointed Daniel A. Pollack as Special Master to conduct and preside over settlement negotiations among the parties to the litigation.The Argentine Republic filed a request that the Court stays the injunctive relief, but the District Court deemed such request inappropriate to the extent that the Court does not have control over whether or not the Argentine Republic makes any payments on the Restructured Securities, and denied the petition.On June 26, 2014 The Bank of New York Mellon, as indenture trustee under the Restructured Securities (the “Indenture Trustee”) received from Argentina the payment of approximately 539 million in United States Dollars and Euros in interest due under the Restructured Securities and retained such funds in its account at the Banco Central de la República Argentina (Central Bank of the Republic of Argentina or the “BCRA”). The District Court suggested that the proper course of action was the return of the funds to the Argentine Republic. However, the Indenture Trustee had three different concerns on such proposed course of action: (i) it could expose the Indenture Trustee to litigation outside the United States; (ii) it raises significant due process considerations to the extent it would go beyond the scope of the injunction; and (iii) in order to return the funds back it would need the Argentine Republic to provide written instructions for a specific account.On June 27, 2014 the District Court clarified that the Amended February 23, 2012 Order did not prohibit payments to Citibank, N.A.’s Argentine branch on Restructured Securities governed by Argentine Law and payable in Argentina. And therefore, on or about June 30, 2014, Citibank transferred to Euroclear SA/NV and Clearstream Banking S.A. certain funds in United States Dollars with respect to those payments. A portion of those funds were to be made available to Caja de Valores S.A. through JPMorgan Chase Bank, N.A. in New York. Upon a request for clarification on JPMorgan Chase Bank, N.A.’s duties under the Amended February 23, 2012 Order, the District Court allowed JPMorgan Chase Bank, N.A. (and all other individuals or entity in the payment chain) to effectuate a one-time payment in respect of those securities.On August 6, 2014, the District Court stated that the payments by Argentina to the Indenture Trustee were illegal and a violation of the Amended February 23 Order; and therefore ordered that the Indenture Trustee retain the funds in its accounts at the BCRA and must not make any transfer of such funds unless ordered by the District Court. The District Court further stated that “BNY’s retention of the Funds in its accounts at the BCRA pursuant to this Order shall not be deemed a violation of the Amended February 23 Orders. BNY shall incur no liability under the Indenture governing the Exchange Bonds or otherwise to any person or entity for complying with this Order and the Amended February 23 Orders”. In response to the restrictions to perform payments under the Restructured Securities described above, on September 10, 2014 the Argentine Congress passed Law No. 26,984 (the “Sovereign Payment Law”), which, among other things, declared the restructurings under the First Offer and the Second Offer of public interest; and, in consideration of the Argentine Republic’s power to remove the Indenture Trustee under the indenture for the Restructured Securities, approved the removal of The Bank of New York Mellon as indenture trustee and its replacement by Nación Fideicomisos S.A., and the opening of an account of Nación Fideicomisos S.A. at the BCRA for purposes of implementing the payments under the Restructured Securities. In addition, and in the event the payments could not be made through Nación Fideicomisos S.A., the law provided for a new exchange of the Restructured Securities for new securities subject to the Argentine law and jurisdiction. Due to the continue violation of the Amended February 23, 2012 Order by the Argentine Republic (including the attempts to exchange the Restructured Securities for securities payable in Argentina and to remove the Indenture Trustee as paying agent under the Restructured Securities) on September 29, 2014 the District Court issued an order to hold the Argentine Republic in civil contempt of court for violating the Amended February 23, 2012 Order reserving the decision on the issue of sanctions. On October 3, 2014 the District Court amended the September 29, 2014 order to include the conditions of the performance that would purge the contempt, which involved reversing all steps taken constituting the contempt.On November 3, 2014 the District Court granted to the Special Master “with authority, in his sole discretion and at a time or times to be determined by him, to add to those cases some or all of such additional cases as are pending before this court in this matter. In recognition of the complexities created by adding such additional cases, the court hereby confirms that the Special Master shall have broad authority to structure the arrangements for such negotiations, as between and among the plaintiffs, as he shall determine in his sole discretion best suited to effect settlement of litigation with the defendant…” (These additional holders of Defaulted Securities are commonly referred to as the “me toos”).In connection with the payments received and retained by the Indenture Trustee on June 26, 2014, certain holders of Restructured Securities governed under English law filed a claim before the courts of London seeking declarations as to (i) that the funds in the amount of €225 held at the Indenture Trustee’s account at the BCRA are held on the trusts under the indenture governed under English law; and (ii) that under the defences available under English law, the obligations and liabilities of the Indenture Trustee under the indenture are unaffected by the injunctions of the District Court, whether or not defendant is subject to that injunctions as a matter of US law. The first declaration was undisputed. However, the court declined to make the second declaration because considered arguable that “where a trustee is subject to a legal inhibition, preventing it from performing its obligations as trustee, that too can provide a defence to a claim for breach of trust under general principles of law.”On June 5, 2015 the District Court granted partial summary judgment to thirty-six plaintiffs (Me Toos) holding Defaulted Securities (the majority of which already had money judgments) seeking the similar ruling on the Argentine Republic’s violation of the pari-pasu rule obtained by the Lead Plaintiffs; and on October 22, 2015, the District Court granted partial summary judgment to additional fifteen plaintiffs on the same basis as stated in the June 5, 2015 order. The Settlement Offer.On February 5, 2016, the Argentine Republic, under a new administration that took office in December 10, 2015 after winning the November presidential elections, made a settlement offer to all holders of the Defaulted Securities that did not participate in the First Offer and the Second Offer (except those in respect of which the statute of limitations has operated), contemplating (the “Settlement Offer”):A “Base Offer”: addressed to all holders of Defaulted Securities who have not obtained granting of the injunction ordered under the Amended February 23, 2012 Order prior to February 1, 2016 (the “Defaulted Securities Holders”) contemplating a payment in cash equal to 100% of the original principal amount under their Defaulted Securities plus an amount equivalent of 50% of such outstanding principal amount; and A “Pari Passu Offer”: addressed to all holders of Defaulted Securities who have obtained granting of the injunction ordered under the Amended February 23, 2012 Order prior to February 1, 2016 (the “Pari Passu Holders”) consisting in:With respect to all those Pari Passu Holders having obtained a money judgment prior to February 1, 2016, a payment in cash equal to 100% of the amount of such money judgment with a deduction of 30%; and With respect to all those Pari Passu Holders that have not obtained a money judgment prior to February 1, 2016, a payment in cash equal to 100% of the amount accrued under the claim with a deduction of 30%; provided that, in both cases, the discount will be reduced to 27.5% if the settlement agreement is executed on or prior to February 19, 2016.Both the Base Offer and the Pari Passu Offer contemplate making the payments with the proceeds of the placement of new securities in the capital markets. All holders of Defaulted Securities participating in the Base Offer and the Pari Passu Offer must waive and release all claims, rights and interests on such securities.The Settlement Offer was conditioned upon its approval by the Argentine Congress and the lifting of the Amended February 23, 2012 Order.After signed an Agreement in Principle with the Lead Plaintiffs on February 29, 2016 the Argentine Republic and the Lead Plaintiffs requested the District Court to approve the payment mechanism. In approving such mechanism, the District Court stated that “[t]he settlements… present the court with extraordinary circumstances because the settlements are “of critical importance to the economic health of a nation”… Any attempt to attach, restrain, or otherwise encumber funds intended for settlement of any action would be contrary to the public interest”.On March 2, 2016, the District Court granted the Argentine Republic’s motion to vacate the Amended February 23, 2012 Order in all actions upon occurrence of the following two conditions precedent: (i) that the Argentine Republic repeals all legislative obstacles (including the Lock Law and the Sovereign Payment Law); and (ii) that all plaintiffs who entered into settlement agreements on or before February 29, 2016 must receive payment in full in accordance with the terms of the settlement agreement.Some of the Lead Plaintiffs filed a request to clarification of the March 2, 2016 order before the District Court to add that “[f]or the avoidance of doubt, if Plaintiffs do not receive full payment in accordance with the specific terms of the AIP for any reason, including if Plaintiffs terminate the AIP on or after April 14, 2016 at 12:00 noon EST in accordance with the terms of the AIP, the Injunctions shall remain in place”, and filed an appeal of the March 2, 2016 vacatur order. On March 11, 2016, the Court of Appeals granted a motion for the stay of enforcement of District Court’s March 2, 2016 order pending resolution of the appeal.On March 31, 2016 the Argentine Congress passed Law No. 27,249, by which repealed the Lock Law and the Sovereign Payment Law and ratified the Agreements in Principle and terms and conditions of the Settlement Offer, subject to the confirmation of the vacatur order by the Court of Appeals (which occurred on April 15, 2016). On April 22, 2016 the Argentine Republic made payment in full under all settlement agreements executed on or before February 29, 2016. Accordingly, after having found that the two conditions precedent to the March 2, 2016 order (as described above) were met, finally the District Court vacated the injunctions in all cases on April 22, 2016.IV.-ConclusionsLimited by its own decisions and errors, the Argentine Republic forced itself into a restructuring process of more than 15 years. By far the largest sovereign default ever. To start, the Argentine Republic took more than 3 years to make the first restructuring offer, and then almost 5 additional years to launch a second restructuring offer.The strategy of the Argentine Republic was to stimulate and encourage adhesion to the Restructuring Offers through different means: (i) limiting re-payment of non-participating Defaulted Securities. For this purpose the Restructured Securities included the RUFO Clause, which granted the holders of the Restructured Securities the right to exchange their Restructured Securities for any new consideration offered to the hold-outs until December 31, 2014; (ii) announcing its intention to avoid any and all payments under the Defaulted Securities not tendered in the Restructuring Offers; and (iii) passing the Lock Law, which prohibited the Argentine Government to make new offers and to conduct any type of settlement with the hold-outs, and approved the removal of all Defaulted Securities from listing.After the Second Offer, the Argentine Republic had restructured an aggregate of approximately 92.4% of the aggregate amount of the Defaulted Securities, but a small group of belligerent hold-outs leaded by the Lead Plaintiffs continued litigating to seek repayment of their Defaulted Securities and obtained final money judgments. The Argentine Republic refused to comply with these money judgments arguing that any such payment or any other settlement with these holders would have triggered the RUFO Clause. This has been the subject of long debates. However, the RUFO Clause was triggered only where the Argentine Republic makes a “voluntary” offer to purchase or exchange the Defaulted Securities. In our opinion, complying with the payments under a final money judgement does not constitute a “voluntary payment”, and to the extent the Argentine Republic was adjudged to make payment in full in cash under those Defaulted Securities subject to the money judgments, it was, therefore, allowed to offer any other consideration which represents more beneficial terms for the Argentine Republic. Despite this, the Argentine Republic continued refusing to comply with the money judgments and/or settle in any manner with the hold-outs and continued litigating, even to the extreme of violating District Court’s orders (for which it was hold in civil contempt).More than 15 years after the default, a new administration in Argentina that took office in December 2015 finally sit for a negotiation with the Lead Plaintiffs and reached a settlement in less than four months, which represented the final end to the historical Argentine default.Mr. Paul Singer, founder and co-CEO of Elliot Management Corp. (one of the Lead Plaintiffs) said that “[throughout this saga, certain commentators and policy makers have argued that the enforcement actions imposed by U.S. courts on Argentina have set a negative precedent for future sovereign-debt restructurings. They claim that bondholders now have little incentive to negotiate a resolution. This line of thinking is wrong – and it risks crippling markets for sovereign debt. In the absence of enforceability, the bonds of sovereigns with questionable credit could drop to near-zero at the first sight of trouble”. In Mr. Singer’s view, “[t]he rule of law is not a liability for a country. It is an asset. Sovereign-debt restructuring can quickly and easily be achieved when both sides are willing to negotiate in good faith.”23 Recently there have been many debates on the need of implementing a sovereign-debt restructuring regime. However, Argentina could have avoided the problems of its sovereign-debt restructuring if its Defaulted Securities would have included a collective action clause (as now do the Restructured Securities). It is not completely clear why such clause was not included originally in the Defaulted Securities, if that was the result of a bargain for obtaining lower interest rates or just negligence.The fact is that now, after the Argentine sovereign-debt default and restructuring, as anticipated by the Court of Appeals, “[i]t is highly unlikely that in the future sovereigns will find themselves in Argentina’s predicament. Collective action clauses – which effectively eliminate the possibility of “holdout” litigation– have been included in 99% of the aggregate value of New York-law bonds issued since January 2005, including Argentina’s 2005 and 2010 Exchange Bonds. Only 5 of 211 issuances under New York law during that period did not include collective action clauses, and all of those issuances came from a single nation, Jamaica.“ *** ................
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