The newly elected government of Argentina recently offered a deal to bondholders who refused to accept a debt restructuring in 2005 and, again, in 2010. Argentina defaulted on its external debt in December 2001. At that time, the country experienced a severe economic recession, made worse by a currency peg with the dollar (the “convertibility plan” established in 1991, rendering the country uncompetitive), prolific debt issuance (public debt increased from 37% in 1995 to 65% at the end of 2001, most of it issued in dollars) and capital flight, resulting in unsustainable debt levels of more than 150% of GDP following the devaluation of the peso. It took until 2005 for the country to restructure its debt with bondholders who were forced to swallow a haircut of about 65%. The pain was widespread as dollar deposits were converted to pesos at parity whereas dollar loans were peso-fied at a different rate, thereby helping borrowers at the expense of savers (a kind of quantitative easing avant la lettre). As only 76% of bondholders participated in the debt swap, the government decided to reopen the deal, at same terms, in 2010, bringing the total of “restructured” debt to 93%. The remaining 7% of holders of defaulted bonds – the so-called holdouts – continued to seek repayment in full. They could not be drawn into a restructuring deal as bond documentation did not contain collective-action clauses (which allows a supermajority to change bond terms). These holdouts included Italian pensioners who somehow thought Argentine sovereign bonds to be a safe haven as well as hedge funds that bought defaulted bonds for cents on the dollar in the secondary market. Some holdouts (specifically NML Capital, a hedge fund controlled by Paul Singer’s Elliott Associates) started legal proceedings in the U.S. (as most bonds are documented under New York law) arguing for full payment under a pari passu clause that required the issuer (Argentina) to treat all bondholders equal.

Surprisingly, U.S. courts said that this clause meant that the bonds should be paid in full (which, obviously, is not an equal treatment at all as restructured bondholders took a severe haircut and only because of this haircut and high participation rate in the restructuring, as well as a lucky run in commodity markets, Argentina now is in a position to offer a higher pay-out). Argentina disputed the interpretation of this clause, but to no avail. In any case, Argentina was not willing to pay up as another clause in the (restructured) bond documentation stipulated that if Argentina would offer better terms to the hold-outs, this deal would automatically be extended to all bondholders (Rights Upon Future Offerings or “RUFO” clause), which would make an improved offer to the holdouts unaffordable. As the U.S. courts disallowed Argentina to pay the restructured bondholders (as well as foreboding financial intermediaries to help Argentina making payments to restructured bondholders) unless the holdouts would be repaid in full, Argentina defaulted in July 2014 on its restructured bonds that are documented under New York law. Meanwhile, the RUFO clause has expired and another even bigger bottleneck to any deal, Cristina Fernández de Kirchner (CFK), has retired.

The new government of Mauricio Macri, who came to power in December of last year, made resolution of holdout debt a priority as the default has restricted Argentina’s access to international capital markets. Argentina’s offer includes three proposals that depend on the legal steps creditors have taken on their claims. Investors lacking a judgment and whose bonds include a pari passu clause are offered as much as 72.5% on their claim, while investors with the same bonds who have a judgment (i.e. Mr. Singer’s NML Capital) will be paid 72.5% of the amount awarded by the court. Bondholders without a pari passu injunction were offered 150% of the principal amount of the bonds they own. Macri’s finance minister, Alfonso Prat-Gay reached a deal with Italian bondholders, paying them USD 1.35 billion (150% of the original principal amount of USD 900 million) on their USD 2.5 billion claim. He also reached a deal with two major hedge funds (including one managing money for Kenneth Dart, a well-known distressed debt investor and tax refugee of questionable reputation). The deals still require approval from Argentina’s Congress. The government also requested U.S. courts to lift the injunction to pay the restructured bondholders coupons due. We sincerely hope that Judge Griesa this time will side with the Argentines. The offer made to Mr. Singer is fair, in our view. Having invested ourselves in the defaulted bonds at the time, it was not at all clear that the exchange offer made in 2005 was such a bad deal for investors: Argentina’s prospects at the time did not look so great, even though it recovered from a deep contraction in 2001-2002, helped by buoyant soybean prices.

Today, the country urgently needs access to dollars to lift the economy out of misery (after years of mismanagement by CFK) and to offer its much-haunted citizens a better future. Apart from the rather unique interpretation of pari passu, we think that U.S. courts should not allow investors, who in this case actually never lend money to Argentina and bought the defaulted bonds for a fraction of the principal amount due, to hold the country hostage as well as disadvantage bondholders who did agree to an exchange in 2005 and 2010. High time for Judge Griesa to correct his mistake and to lift the injunction.