NEW YORK -- The European Bondholders of Restructured Argentina Debt have filed suit against bond settlement agency Euroclear and bond trustee Bank of New York Mellon Brussels in Belgium to try to force the delivery of interest payments after a U.S. Federal judge in New York blocked the payment and told the Bank of New York to return the money to Argentina.
“The Euro bondholders have initiated litigation in Belgium against Euroclear and BYNM Brussels to obtain an order confirming that the Injunctions are not enforceable there,” wrote Latham & Watkins partner Christopher Clark, in a Memorandum of Law he submitted last week (see pp15-16 of the Memorandum of Law below). “The Euro Bonds are governed by the laws of England and Wales, and they are paid in euro, by foreign entitites that are outside of this Court’s jurisdiction, and through a payment process that does not flow through the U.S. “
“At no point in the Euro Bonds’ payment chain do funds comprise U.S. dollars, enter the U.S., or flow through U.S. entities,” wrote Clark, a former Assistant US Attorney in New York, who successfully defended internet billionaire Mark Cuban in an insider trading case brought by the U.S. Securities and Exchange Commission (SEC) last year.
As the documents attached below indicate, Clark has also sought “clarification” from U.S. Federal Judge Thomas Griesa on the scope of the Injunctions, arguing that they do not and cannot apply to the Euro denominated and ruled bonds.
On June 27, Judge Griesa granted Citibank’s motion for clarification and excluded Citibank and the Argentina law bonds from the scope of the Injunctions, even though they are handled by a foreign subsidiary of a U.S. institution. “Notably, the reasons for excluding Citibank and the Argentine Law Bonds from the scope of the Injunctions apply equally to the third parties that process payment on the Euro Bonds: both sets of bonds are paid by Argentina outside of the US and are governed by foreign law, and the foreign parties that process the Euro Bond payments will face exposure in their home forums if they comply with the Injunctions,” wrote Clark.
By filing suit against Bank of New York Mellon Brussels and Euroclear, European bondholders are making sure that exposure comes true.
In response to a similar effort to block Euroclear from distributing funds to the holders of Nigeria’s exchanged debt, Belgium enacted a law in 2004 that expressly precludes enforcement of an injunction against Euroclear or other Belgian or foreign institutions acting as cash correspondents. “Any cash settlement account maintained with the operator of a system or with a cash settlement agent, as well as any cash transfer, through a Belgian or foreign credit institution, to be credited to such cash settlement account, cannot be attached, put under sequestration or otherwise blocked by any means by a participant (other than the operator or the settlement agent), a counterpart or a third party,” the Belgium law states.
Funding the Euro bondholders’ lawsuit is an ad hoc committee made up of Knighthead Capital Management, Redwood Capital Management, Perry Capital, VR Global Partners, Monarch Master Funding 2 (Luxembourg), Silver Point Capital, QVT Fund IV, OVT Fund V, Quintessence Fund and Centerbridge Partners. They were joined by New York-based Fintech, which filed a brief note of its own (see below).
Argentine government representatives are due to meet Monday, July 7, with a group of holdout creditors led by New York-based Elliott Management Corp.’s NML Capital Ltd unit.
The talks come at the urging of U.S. District Court Judge Thomas Griesa, whose rulings in favor of NML Capital were upheld last month by the U.S. Supreme Court.
In a November 2012 decision, Griesa ordered Buenos Aires to repay more than $1.3 billion in defaulted debt to the litigating hedge funds.
Implementation of Griesa’s order would lead other holdout bondholders that were not part of the New York litigation to demand full repayment on the defaulted debt, according to Argentine President Cristina Fernandez’s administration.
Argentina says those potential claims would bring the total owed to the holdouts to some $15 billion, equivalent to half of its foreign-exchange reserves, and trigger a default.
Argentina originally defaulted on almost $100 billion of its foreign debt. Most bondholders, who had little choice after not being paid anything by Argentina for 5 to 10 years, agreed to be paid about 30 cents on the dollar through a "debt exchange." During these two offers, 92.4% of the eligible debt was exchanged. Argentina indicated that on completion of the debt exchange, it would no longer honor untendered original obligations.
Argentina had agreed and contracted that much of the original obligations were governed by New York law, however, and some distressed debt hedge funds, like NML and Aurelius, and many other unhappy investors did not participate in the debt exchange and sued Argentina in the U.S. District Court in Manhattan, demanding payment under the terms of the original obligations. In 2012, the District Court agreed with these holders and ordered Argentina to pay all amounts due under the terms of the unexchanged original obligations. Argentina has refused to pay.
On June 26, 2014, Argentina paid the Bank of New York Mellon (BoNY), as trustee for the discount bonds, $539 million in respect of an interest payment due on June 30, 2014 on the restructed debt. On June 27, holders of unexchanged original obligations asked the District Court to enforce a previous court decision to block the interest payment to holders of the discount bonds until the holders of the unexchanged original obligations received the amounts due to them. As a result, the District Court ordered BoNY to return the funds to Argentina.
Argentina is now in technical default on the interest payment, but has a 30 day grace period to resolve the impass.
"If Argentina fails to pay the interest on the bonds by July 30, the "technical default" becomes an "event of default," says international lawyer Russ Dallen, who heads Caracas Capital Markets. "Under the terms of the Restructured Bond contract, that means that all $30 billion of Argentina's restructured debt can become immediately due and payable."
NML v Argentina Memo of Law From Euro Exchanged Bondholders 29 June 2014 by Latin American Herald Tribune
NML v Argent Letter From Euro Bondholders 29 June 2014 by Latin American Herald Tribune
NML v Argentina Declaration of Euro Counsel for Clarification 29 June 2014 by Latin American Herald Tribune
NML v Argentina Fintech Supports Euro Payment Exclusion From Griesa Order 30 June 2014 by Latin American Herald Tribune
NML v Argentina Documents submitted by NML in support of their Motion to Hold Argentina in Contempt 27 June... by Latin American Herald Tribune
NML v Argentina Original Brief 5 August 2008.pdf by Latin American Herald Tribune
Argentina Debt Restructuring Prospectus 2010 by Latin American Herald Tribune
Transcript US Supreme Court on Discovery NML v Argentina 21 April 2014 by Latin American Herald Tribune