Just as the ever soaring Argentina default swaps indicated that a technical default for the Latin American country - one which would eventually morph into a second full blown default in a decade - was all but inevitable (and previews extensively here), the twisting and turning multi-year story of Argentina vs its "vulture" holdout creditors got its latest dramatic installment last night. Shortly after market close, the Second Circuit court of appeals once again override last week's critical order by Judge Griesa that Argentina promptly pay everyone or face monetary exclusions, lumping together any and all agents who facilitated the ongoing isolation of the holdout hedge funds from the broader group which in Griesa's view had pari passu status throughout.
To wit (pdf):
"IT IS HEREBY ORDERED that the motion by the Exchange Bondholder Group for leave to intervene as interested non-parties for the purpose of appealing orders entered by the district court on 11/21/12 and for the purpose of seeking a stay pending appeal is GRANTED."
The immediate result: Argentina GDP Warrants surged the most this year, rising 1.88 cents or 20%, to 11.40, as hope that an immediate technical default could be avoided.
As a further result, Reuters promptly added that "Argentina has won a reprieve against having to pay $1.33 billion next month to "holdout" investors who rejected a restructuring of its defaulted debt and have waged a long legal battle to be paid in full. Argentina argued that, if left to stand, the order would make future restructurings impossible for countries facing debt crises because creditors would have no incentive to exchange their bonds at a discount. However, some legal experts said Griesa's order would not have such broad ramifications because Argentina hurt its own cause in refusing to pay the holdouts, and that Griesa's ruling focused on the government's behavior in this specific case."
While the above is completely correct, there is a more nuanced interpretation of the events, one which of course involves the role of the "exchange" bondholders as well as their very floral lawyers.
As the FT had discussed before:
The group of “exchange” bondholders, led by the fund Gramercy, but also including Brevan Howard, one of the world’s biggest hedge funds, sought the reimposition of the stay to “ensure that interest payments to the bondholders continue while the appeal is decided”, David Boies, a lawyer for the group, said.
“The exchange bondholders agreed to take under 30 cents on the dollar to support Argentina’s debt restructuring in accordance with US government and international fiscal policy. They should not be further penalised,” Mr Boies added.
Argentina swapped nearly 93 per cent of the almost $100bn on which it defaulted in 2001 in two rounds of restructuring in 2005 and 2010. As a result, it now considers the default history.
The exchange bondholders also entered a declaration by Stephen Choi, a New York University School of Law professor. Mr Choi said Judge Griesa’s order – and a separate ruling by the Second Circuit Appeals Court in October – would “reduce the ability of sovereigns in economic and financial distress to engage in efficient, value-increasing restructurings”.
He added that it was likely that “sovereigns that traditionally issued bonds under New York law will switch to English law and possibly other jurisdictions including local law”.
In other words, the underlying dynamics here have shifted from much more than a mere case of equitable treatment of an impaired bondholder class (so found in a court with US jurisdiction), but now have implications over the entire sovereign distressed debt process and protocol, which in the process could force creditors to avoid US bondholder protections in the future, and to seek UK, Swiss or even Japanese bond indenture jurisdictions. The shift to local law would certainly be quite curious as it is precisely what the key fulcrum issue in an insolvent Europe is. Recall that as Lee Buccheit said several months ago it is the vast preponderance of weak-protection local bonds in Spain, that will allow for a comparable cram down in the country similar to that which happened in Greece previously. It is just a matter of time.
More curious, is that what until now was merely a headline grabbing conflict between a hedge fund: Elliott, and a sovereign, has now morphed into one between a hedge funds (or two: Elliott and Aurelius - the "Holdouts") and other hedge funds (Brevan Howard and Gramercy - the "Exchanges"). In other words, whereas previously it was the smart money vs what many consider "dumb" Argentina public servants, Argentina now has very vocal a hedge fund backing on its side, in this case mega fund Brevan Howard, who will do anything to prevent the halts of cashflows from Argentina, even if that means taking on not only Paul Singer but Judge Griesa directly.
But where the conflict's escalation will be by far the most entertaining, is in the legal arena. Because as the Guardian below summarizes, the two key opposing lawyers already are quite familiar with each other...
The latest big gun to enter the fray is celebrated attorney David Boies, whose appearance is the latest sign of escalating stakes in the case. Boies, a partner at Boies, Schiller & Flexner, represents holders of Argentine bonds who agreed to two rounds of restructurings in which Argentina issued new debt at a steep discount.
His appearance also sets up a potential rematch between Boies and another top-flight attorney, Theodore Olson, who is representing an opposing group of investors. Olson represented former President George W. Bush at the Supreme Court in a case that decided the U.S. presidential election in 2000. Boies represented Democratic candidate Al Gore, who lost the election.
Olson, a partner at Gibson, Dunn & Crutcher and a former solicitor general under Bush, represents investors who refused to participate in the restructurings, the so-called holdout bondholders.
Argentina may have avoided an immediate default, but it is likely that the Elliott wing will do everything in its power to return to the pre-appeal status quo asap. This will be fought tooth and nail by the Exchanges, and soon, in court, potentially escalating all the way to the SCOTUS.
One thing is certain: the drama and the excitement of watching Boies vs Olson in the Supreme court once more this time discussing not hanging chads, but Argentinian solvency, coupled with the navies of Elliott and Brevan Howard, will be truly fascinating stuff.