Elliott Management Vs Argentina Round 2: Now It's Personal
When it comes to international bondholder process, work out and restructuring (and litigation), on the one hand there is Europe, and specifically the ongoing Greek reorganization into an ever tinier balance sheet by way of cramming down weak-covenant, local-law bondholders (who are "encouraged" to participate in ever more coercive principal recovery events, as defection would result in wipeouts of recoveries in other cross-held bonds of the impaired class should a Grexit-type event occur, which then would lead to massive losses on all European bond holdings for the same creditors: a true Mutually-Assured Destruction scenario, as the IIF's Jacques Dallara understood quite well), and on the other hand there is Argentina.
But whereas the European fiasco is still (relatively) structured (at least until Spain et al join the cram down fray, something none other than Lee Buchheit predicted would happen courtesy of the prevalence of local-law bonds in PIIGS outstanding inventory), if getting more complicated with incremental subordination of various junior classes of sovereign debt either due to legal reasons - i.e., local-law vs international-law bonds, structural reasons: the presence of Collective Action Clauses in consent solicitations and "indenture-stripping" thresholds for a holdout class (think perpetual fly-in-the-ointment Elliott), or due to the far more abstract "unimpairability" and primacy of the bondholder - i.e. the IMF, the ECB, or another Official Sector entity (all of which was previously explained here), in Argentina it is a totally chaotic free-for-all, where a distressed creditor holdout is now unilaterally pursuing "incremental recovery" of par in local and international courts of law.
The distressed creditor, in this case, is international bondholder litigation expert, hedge fund Elliott Associates which had purchased Argentina bonds with pari passu clauses shortly before the country's 2001 default which involved $100 billion in sovereign debt - the biggest (so far) sovereign default, but at prices at fractions of par, and the "incremental recovery" in this case being an Argentinian three-mast frigate, the ARA Libertad (which serves as a school ship in the Argentine Navy) which the fund "seized" after it was impounded off the coast of Ghana a month ago "following judgments in our favor against Argentina in the U.S. and the U.K." as Elliott writes in its latest investor letter.
In other words, both Elliott and Argentina are learning the hard way, that in an insolvent world where there is no driving force to push the debtor and creditor to reach amicable, if increasingly more unpleasant outcomes (such as Europe, if only for the time being), one has to resolve to ever more unpleasant tactics to get what one believes belongs to them.
What is particularly interesting in the drawn out legal case of Elliott, or technically NML Capital, vs Argentina, western courts have ruled in Elliott's favor on several occasions, most recently the 2nd Circuit Court of Appeals, which upheld the Pari Passu clause of the pre-petition bonds. To wit:
We hold that Argentina breached its promise and, accordingly, affirm the underlying judgments of the district court.
In brief, what this means is that Elliott which bought Argentina bonds, of which there was about $100 billion nominal, at a discount, spearheaded a holdout class that refused to be rolled into an exchange offer whereby the firm would receive 25-29 cents in recovery (roughly comparable to what Greek bondholders got in the first PSI from early this year), and instead has held out for par recoveries. Argentina, in turn, has refused to concede to Elliott's demand and while continuing to pay the consenting creditors, is adamant in refusing to even acknowledge that Elliott has any rights, despite numerous courts finding the firm falls under a pari passu umbrella.
What this really means is that Western courts have decided that Elliott has not been stripped of pre-petition rights despite, or rather in spite of, holding out, and is entitled to collecting up to par recovery. There is one problem: there is absolutely no enforcement mechanism!
And therein lies the rub: because how does a court located on Pearl Street in New York order the Argentina State Treasurer located in Buenos Aires to wire a payment on bonds, via intermediary banks, that Argentina effectively has disowned? It can't. Or rather, it can't using peaceful means and/or simple M.A.D. coercion of the type one can apply in Europe (remember: Greek creditors had to agree to a massive haircut, and more to come, as the alternative was a Greek default, Grexit, collapse of the Eurozone, dissolution of the EUR, redenomination, massive losses on Spanish and Italian bonds, and who knows what other apocalyptic scenarios). It can, of course, use military means but the time for a Falklands-type escalation has not come yet. Indeed, the fact that there is no way to enforce any judgment is why the Second District added the following remand in its judgment:
However, the record is unclear as to how the injunctions’ payment formula is intended to function and how the injunctions apply to third parties such as intermediary banks. Accordingly, the judgment is affirmed except that the case is remanded to the district court for such proceedings as are necessary to clarify these two issues.
Elliott, in court, stated that as part of its proposed enforcement process, the next step would be to go after complying intermediary banks for aiding and abetting, by paying exchange bondholders without paying the holdouts. However, what is clear is that in the case of enforcing intermediary banks from complying with any judgments, there is again no set case law, and whereas Elliott will litigate, and likely win, by the time there is a final injunction, Argentina will likely have defaulted once more (there is a reason why its bonds have plunged in recent days, and it has nothing to do with this particular sideshow which is merely litigation from its last restructuring). In the meantime, Elliott continues to be the odd man out and there is no way to force anyone to wire it money, despite its legally-enforced argument it has fully equitable claims.
Today, Argentina confirmed all of this, after its economy minister stated, very clearly, that no deal would be struck to pay "vulture funds", and that Elliott would get no love from Buenos Aires, and certainly not one penny. From the Buenos Aires Herald:
Economy minister Hernán Lorenzino assured today that the government “will never pay” the ‘vulture funds,’ although also affirmed that it will continue to pay “93 percent of the credit owed."
“We will continue to pay them in dollars, euros and yens, as we should be. We will respect up to 93 percent of the bond payments.”
“Those who think differently haven’t understood anything. What happened with the ship (Libertad) and the ruling in New York last week are attacks that do not go by the book.
"Clearly there are sectors that can’t cope with the successes of debt-reduction.”
We now eagerly await to see what Argentina's response will be to "attacks that do not go by the book" - most likely nothing. But the Libertad diversion has hardly made Argentina a fan of Elliott's tactics.
As for Elliott, what just happened with the ship confiscation case study is a model of how the fund will generate ongoing recoveries: it will literally "grab" any Argentinian property it can in friendly jurisdictions, and await for a judgment that makes it officially property of the hedge fund. The only problem with this approach is that it will have to confiscate a whole lot of Argentinian assets - NML has said it was willing to release the vessel in exchange for a bail of $20 million. Considering Elliott's claim is for $1.6 billion in Argentina bonds (notional value, the cost is far, far lower), the hedge fund would need to become the world's largest legal and legitimate privateer.
And while this in many ways is almost a comic diversion, it brings us to a topic which we are confident will be far more discussed in 2013: how creditors will be "made whole" on their international bond claims in a world in which there is about $30 trillion in excess debt. Sadly, there will not be nearly enough frigates to satisfy everyone. The reason: even as sovereign debt piles on more and more and more (to offset the leveraging by the household, financial and corporate sectors), the actual sovereign assets are declining with each passing day, as the newly raised money goes not to rebuild an asset base (a prudent investment decision), but to fund already deficient capital in a global welfare state that is simply unsustainable.
But much more on that in early 2013, when the international defaults commence in earnest, first in Spain where local-law bonds will be the first to go, then Japan, and thereafter: everywhere else.
As for the Argentina vs Elliott bare-knuckled match, enjoy it while you can: very soon the Latin American country will likely proceed with yet another round of creeping selective defaults, exchange offers, consent solicitations, and other debt reorganizations, which will make the current free-for-all into a total and epic labyrinth of creditors, interests, bondholder classes, general unsecured claims, and other total confusion which we are confident, will soon lead Elliott to give up in disgust and just walk away.
After all why bother with Argentina: there are far higher IRRs to be generated by shorting local-law Spanish bonds while buying their international-law cousins. In fact, courtesy of the current government's arrogance and naivete, the position can be put on in a cost, and carry, neutral basis. Then sit back and just wait for the spread to blow out.
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