Lessons from the Argentine Perspective

Introduction

Argentina has defaulted on its international sovereign debt nine times, three during the past two decades. In 2001, the government defaulted on more than US$132 billion of federal sovereign debt. By the end of 2019, Argentina owed about US$323 billion of federal sovereign debt to, among others, the International Monetary Fund (IMF), the Paris Club and private bondholders. In May 2020, Argentina defaulted again on the payment of its international sovereign bonds while pursuing their restructuring.

Although the restructuring of sovereign debt with the IMF and the Paris Club is dealt with in one-to-one negotiations, the restructuring of sovereign bonds involves a more complex process. During the past 20 years, Argentina went through two sovereign debt restructuring processes between 2005 and 2015 and in 2020. Argentina has learned some lessons from these processes, mainly from the 2005–2015 restructuring, which contributed to a more efficient process in 2020. We discuss each of these processes, their differences and the lessons learned from each.

The 2005–2015 restructuring

The First Offer

The exchange offer

Argentina took more than 36 months from the default to make its first restructuring offer, launched on 14 January 2005 (the First Offer), to voluntarily restructure more than US$81.8 billion of sovereign foreign debt represented by more than 150 securities issued in several currencies and jurisdictions and subject to different applicable laws (the defaulted securities).

The First Offer consisted of a list of new securities, including par bonds due December 2038, discount bonds due December 2033, quasi-par bonds due December 2045 and GDP-linked securities with expiry in December 2035 (the New Securities).

The RUFO clause

As an incentive to participate in the offer, the New Securities included a ‘right upon future offers’ (the RUFO clause) covenant (that constituted a ‘reserved matter’ under the trust indenture) by which if on or before 31 December 2014 Argentina made an offer to the outstanding defaulted securities not tendered in the First Offer, then the holders of the New Securities would have the right to exchange their New Securities for the consideration offered by Argentina in the new offer.

The New Securities included for the first time a collective action clause, pursuant to which any amendment or waiver to the New Securities of a single series, or to the indenture insofar as it affects all New Securities, may be made or waived with the consent of holders representing not less than 66.66 per cent of the aggregate principal amount outstanding of the applicable New Securities. However, any modification of certain matters (including a change to the maturity date and amendment or waiver of the RUFO clause) may be made or waived with the consent of holders of not less than 75 per cent of the aggregate principal amount outstanding of the applicable New Securities. If Argentina proposed any reserved matter to two or more series, or to the indenture, insofar as it affects two or more series of the New Securities, Argentina may elect to proceed to make that modification or waiver for all affected series of the New Securities if made with the consent of the holders of:

• not less than 85 per cent of the total principal amount of the outstanding New Securities of all series affected (taken overall); and
• not less than 66.66 per cent of the total principal amount of the outstanding New Securities of each applicable series (taken individually).

The inclusion of this collective action clause constituted a new important feature of the New Securities, which greatly reduced the chances of holdout litigation occurring again in the future.

The Lock Law

In an attempt to put pressure on the 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^[2] stated that eligible securities not exchanged pursuant to the offer would remain outstanding. Argentina had stated that it had no intention of resuming payments on any eligible securities that remained outstanding after expiry of the offer.

Second, on 9 February 2005, Congress passed Law No. 26,017 (known as the Lock Law), which, with respect to all defaulted securities not tendered in the First Offer, (1) prohibited the government from reopening any additional exchanges after expiry of the First Offer (which occurred on 25 February 2005), (2) prohibited the government from conducting any type of in-court, out-of-court or private settlement, and (3) required the government to remove all defaulted securities from listings on all domestic and foreign markets and exchanges.

Result of the First Offer

On expiry of the First Offer, holders of a total of approximately US$62.3 billion, representing 76.15 per cent of the total amount of the defaulted securities, tendered their defaulted securities in exchange for the New Securities.

The Second Offer

The Exchange Offer

On 18 November 2009, Congress passed Law No. 26.547, which suspended the effects of the Lock Law until 31 December 2010, and authorised the government to relaunch the offer to restructure the outstanding defaulted securities, provided that the financial terms and conditions offered to the remaining holders of the defaulted securities were not equal to, nor better, than those offered under the First Offer.

According to the foregoing, on 26 April 2010, the government launched the second offer since the default (the Second Offer, and with the First Offer, the Restructuring Offers), pursuant to which it offered the holders of defaulted securities not tendered in the First Offer and holders of the New Securities exchanged in the First Offer to exchange their securities for a set of discount and par bonds (the Additional New Securities, and with the New Securities, the 2005 Indenture Bonds).

In general terms, compared with the New Securities, the Additional New Securities had longer maturities and lower interest rates and, in respect of those exchanged for defaulted securities, were not entitled to interest accrued after 31 December 2001. In addition, in almost all cases, the principal amount of the Additional New Securities received in the Second Offer was less than the principal amount of the New Securities delivered in respect of the same amount of defaulted securities in the First Offer.

Result of the Second Offer

On expiry of the Second Offer, holders of a total of approximately 92.4 per cent of the total amount of the defaulted securities restructured their defaulted securities in the restructuring offers.

The holdouts litigation

In 2011, a number of holders of defaulted securities issued by Argentina under a fiscal agency agreement in 1994 (the FAA, and the defaulted securities issued thereunder, the FAA Bonds), who had obtained money judgments against Argentina that they were not able to collect (the plaintiffs) filed a motion before the US District Court for the Southern District of New York^[3] seeking a partial summary judgment declaring that Argentina had violated the FAA pari passu clause.

The plaintiffs claimed that Argentina had violated the FAA Bonds’ pari passu clause by creating a class of creditors who were guaranteed payment while formally condemning the plaintiffs to a lower rank, which would be barred from receiving any payment at all. The US District Court admitted the motion on 7 December 201^[4] and the plaintiffs filed a motion for equitable relief as a remedy for the violations. On 23 February 2012, the US District Court found that there was no adequate relief and remedy at law for Argentina’s violations under the FAA:

because the Republic has made clear . . . its intention to defy any money judgment issued by this Court . . . [and] [b]ecause 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.^[5]

The US District Court therefore ordered that:

• whenever Argentina makes any future payment under the 2005 Indenture Bonds, or any securities replacing them, Argentina shall concurrently or in advance make a ‘Ratable Payment’^[6] to the plaintiffs;
• Argentina is enjoined from making any payments under the 2005 Indenture Bonds without complying with this ‘Ratable Payment’; and
• all parties involved, directly or indirectly, in advising on, preparing, processing or facilitating any payment under the 2005 Indenture Bonds (the agents and participants) must be given notice of this order.

Furthermore, the court 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 23 February 2012 Order).^[7] The 23 February 2012 Order was affirmed by the US Court of Appeals for the Second Circuit (the US Court of Appeals).

On 21 November 2012, following undisputed public declarations by the president of Argentina and other high-ranking officials stating that Argentina would not obey the US District Court’s rulings, the Court vacated the 23 February 2012 Order and amended it, ordering that all payments due under the 2005 Indenture Bonds were to be made into an escrow account and redefining the participants^[8] that were bound by the terms of that Order (the Amended 23 February 2012 Order).

On 23 August 2013, the US Court of Appeals affirmed the Amended 23 February 2012 Order and stayed enforcement pending resolution by the US Supreme Court of a timely petition for a writ of certiorari. However, the Supreme Court denied the petition on 16 June 2014 and, on 18 June 2014, the Court of Appeals lifted the stay of enforcement of the Amended 23 February 2012 Order injunction. Immediately thereafter, the District Court appointed Daniel A Pollack as Special Master to conduct and preside over settlement negotiations between the parties to the litigation.

On 26 June 2014, the Bank of New York Mellon, as indenture trustee under the 2005 Indenture Bonds (the Indenture Trustee), received from Argentina a payment of approximately US$539 million in interest due under the 2005 Indenture Bonds and retained the funds in its account at the Central Bank of the Republic of Argentina (BCRA). The US District Court suggested that the proper course of action was for the funds to be returned to Argentina. However, the Indenture Trustee had three different concerns about this proposed course of action: (1) it could expose the Indenture Trustee to litigation outside the United States; (2) it raised significant due process considerations to the extent it would go beyond the scope of the injunction; and (3) to return the funds, it would need Argentina to provide written instructions for a specific account.

On 6 August 2014, the US District Court stated that the payments by Argentina to the Indenture Trustee were illegal and a violation of the Amended 23 February 2012 Order, and therefore ordered that the Indenture Trustee retain the funds in its accounts at the BCRA and not make any transfer of the funds unless ordered by the US District Court. The Court further stated that the Bank of New York’s retention of the funds in its BCRA accounts pursuant to the court order should not be deemed a violation of the Amended 23 February 2012 Order., and that the bank should incur no liability under the indenture governing the Exchange Bonds or otherwise to any person or entity for complying with the Order and the Amended 23 February 2012 Order.^[9]

In response to the restrictions on making payments under the 2005 Indenture Bonds described above, on 10 September 2014, the Argentine Congress passed Law No. 26,984 (the Sovereign Payment Law), which, among other things approved the removal of the Bank of New York Mellon as Indenture Trustee and its replacement by Nación Fideicomisos SA.

Owing to the continued violation of the Amended 23 February 2012 Order by Argentina, the US District Court issued an order on 29 September 2014 to hold Argentina in civil contempt of court for violating the Amended 23 February 2012 Order, reserving its decision on the issue of sanctions.

On 3 November 2014, the US District Court granted to the Special Master ‘authority . . . to add to those cases some or all of such additional cases as are pending before this court in this matter’. (These additional holders of defaulted securities are commonly referred to as the ‘Me Toos’).^[10] On 5 June 2015 and 22 October 2015, the Court granted partial summary judgment to 41 plaintiffs (Me Toos) seeking a similar ruling on Argentina’s violation of the pari passu rule obtained by the plaintiffs.^[11]

The Settlement Offer

On 5 February 2016, after the RUFO clause had expired and under a new administration, Argentina made a settlement offer to all holders of the defaulted securities that had not participated in the restructuring offers, contemplating:

• a base offer, addressed to all holders of defaulted securities who had not obtained a grant of the injunction ordered under the Amended 23 February 2012 Order prior to 1 February 2016 (the defaulted securities Holders) contemplating a payment in cash equal to 100 per cent of the original principal amount under their defaulted securities plus an amount equivalent to 50 per cent of the outstanding principal amount; and
• a pari passu offer, addressed to all holders of defaulted securities who had obtained a grant of the injunction ordered under the Amended 23 February 2012 Order prior to 1 February 2016 (the pari passu Holders)^[12] consisting of (1) with respect to all pari passu Holders that had obtained a money judgment prior to 1 February 2016, a payment in cash equal to 100 per cent of the amount of the money judgment with a deduction of 30 per cent, and (2) with respect to all pari passu Holders that had not obtained a money judgment prior to 1 February 2016, a payment in cash equal to 100 per cent of the amount accrued under the claim with a deduction of 30 per cent, provided that, in both cases, the discount would be reduced to 27.5 per cent if the settlement agreement was executed on or prior to 19 February 2016.

Both the base offer and the pari passu offer contemplated making the payments with the proceeds of a new international placement of US$16.5 billion in New Securities in the international capital markets that were issued pursuant to the indenture dated as of 22 April 2016 (the 2016 Indenture Bonds). All holders of defaulted securities participating in the base offer and the pari passu offer had to waive and release all claims, rights and interests on those securities.

The settlement offer was conditional on its approval by the Argentine Congress and the lifting of the Amended 23 February 2012 Order.

After signing an agreement in principle with the plaintiffs on 29 February 2016, the Argentine Republic and the plaintiffs requested the US District Court to approve the payment mechanism. In approving this mechanism, the Court stated: ‘The 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.’^[13]

On 2 March 2016, the US District Court granted Argentina’s motion to vacate the Amended 23 February 2012 Order in all actions subject to two conditions: (1) that Argentina repeal all legislative obstacles (including the Lock Law and the Sovereign Payment Law); and (2) that all plaintiffs who entered into settlement agreements on or before 29 February 2016 must receive payment in full in accordance with the terms of the settlement agreement.

On 31 March 2016, Congress passed Law No. 27,249, which repealed the Lock Law and the Sovereign Payment Law and ratified the agreements in principle and terms and conditions of the settlement offer. On 22 April  2016, Argentina made payment in full under all settlement agreements executed on or before 29 February 2016. Accordingly, after having found that the two conditions precedent to the 2 March 2016 order (as described above) were met, finally the US District Court vacated the injunctions in all cases on 22 April 2016.

The 2020 restructuring

Introduction

By the end of 2019, Argentina owed about US$323 billion in federal sovereign debt, which represented 89.5 per cent of Argentina’s gross domestic product, and the government was facing payments of about US$52 billion in 2020 and of about US$37 billion in 2021 on sovereign debt both in US dollars and Argentine pesos. Since 2018, Argentina has been experiencing increasingly strong fluctuations in currency exchange rates, a substantial gap between the official exchange rates and the alternative exchange rates, and high inflation. In addition, the measures adopted by the government to control inflation actually caused a deepening recession. In 2020, the general macroeconomic conditions worsened yet more as a result of the outbreak of the covid-19 pandemic. As a result, the government was in urgent need of restructuring its sovereign debt yet again.

The 2020 restructuring offer

The offer

On 12 February 2020, the Argentine Congress enacted Law No. 27,544 for the Restoration of the Sustainability of the Public Debt issued under Foreign Law, authorising the Ministry of Economy to restructure the government’s public debt; and on 9 March 2020, the government issued Decree No. 250/2020, which authorised negotiations for the restructuring of US$68.85 billion in foreign currency and foreign law-governed sovereign bonds. However, on 16 March 2020, the Ministry of Economy approved a request for the registration of a prospectus for the issuance and sale or exchange of up to US$31.6 billion worth of new bonds, representing less than 50 per cent of the principal amount of the sovereign debt to be restructured. At that time, the strategy of the government was still unclear and there were doubts as to whether the application was intended as a ‘test of the waters’ or a plan for restructuring in stages.

On 21 April 2020, the government launched an exchange offer to the holders of the eligible 2005 Indenture Bonds and the 2016 Indenture Bonds for an total principal amount of approximately US$68.8 billion. The main difference between the 2005–2015 restructuring and the 2020 restructuring was that the eligible bonds in the latter had collective action clauses; and this was the first time the collective action clauses would be tested.

Pursuant to the 2005 Indenture Bonds, the proposed restructuring required the consent of holders of (1) not less than 85 per cent of the total principal amount of the eligible 2005 Indenture Bonds (taken in aggregate), and (2) not less than 66.66 per cent of the total principal amount of each series of the eligible 2005 Indenture Bonds (taken individually) (two-tier prong majority requirement) to become effective.

Pursuant to the 2016 Indenture Bonds, the proposed restructuring required the consent of holders of (1) more than 66.66 per cent of the total principal amount of the eligible 2016 Indenture Bonds and the eligible 2005 Indenture Bonds (taken in aggregate), and (2) more than 50 per cent of the total principal amount of each series of the eligible 2016 Indenture Bonds (taken individually) (two-tier prong majority requirement) to become effective.

The initial offer included a reduction of the principal amount of certain series of the eligible bonds, an interest payment grace period until November 2022, and coupons between 0.5 per cent and 0.6 per cent between November 2022 and November 2023 or 2025, depending on the series of the new bonds, and increasing to between 1 per cent and 4.875 per cent from those dates until final maturity, depending on the series of the new bonds.

Two controversial strategies

In its initial offer, Argentina intended to circumvent the collective action clauses through the adoption of two controversial measures: the redesignation and the ‘Pacman’.

The redesignation strategy

The redesignation was intended to change the voting pool after the votes had been cast, unilaterally changing the existing terms of the bonds indenture. Pursuant to the initial offer, the allocation of the series was subject to redesignation at the government’s discretion, pursuant to which the redesignated series of eligible 2005 Indenture Bonds and eligible 2016 Indenture Bonds would be excluded for the purposes of determining whether the requisite consent for the approval of the proposed modifications to the bonds indenture under the two-tier prong majority requirement have been obtained on an aggregate or single series of the eligible bonds.

The ‘Pacman’ strategy

The ‘Pacman’ strategy was intended to combine the dissenting redesignated excluded bonds, permitting a repetitive use of a ‘single-limb’ option to sweep up non-consenting holders. Pursuant to the initial offer, the restructuring would be effective with respect to any excluded bond series, subject to the consent of holders of not less than 75 per cent of the total principal amount of any such excluded series.

The outcome

When the initial offer expired on 8 May 2020, the government’s initial offer received a very low level of acceptance (less than 20 per cent).

After negotiations with a group of eligible bond holders, Argentina and those holders reached a consensus. In addition to effecting a minimal enhancement of the economic terms of the new bonds, the agreement restricted the proposed redesignation and Pacman strategies by (1) amending the modification provisions of the new bonds to expand the list of reserved matter modifications and specify the future circumstances under which the Republic could ‘redesignate’ the series of debt securities affected by a reserved matter modification or (2) if applicable, conducting a ‘uniformly applicable’ modification (by which the holders of any series of the eligible bonds affected by that modification are invited to exchange, convert or substitute their bonds on the same terms for new instruments or other consideration) subsequent to a cross-series modification with two-tier voting or a restructuring exchange offer. If Argentina seeks a cross-series modification with single aggregate voting, in determining whether the modifications will be considered uniformly applicable, the holders of any series of the bonds affected by the reserved matter modification shall be deemed ‘holders of debt securities of all series affected by that modification’ for the purposes of the uniformly applicable definition (described above).

After these amendments were effected, on expiry of the last extension of the invitation term on 28 August 2020, the government obtained consent to exchange or restructure 99.01 per cent of the total principal amount of all series of the eligible bonds (approximately US$64.8 billion).

Conclusion

Argentina has been a good source of lessons of the types of conduct not to follow and innovations affecting future sovereign debt restructurings.

After the 2001 default, limited by its own decisions and errors, Argentina forced itself into a restructuring process of more than 15 years. At the time, this was by far the largest sovereign default. To start, Argentina took more than three years to make the first restructuring offer, almost five additional years to launch a second restructuring offer and almost seven additional years to close the pending litigation and restructuring with the holdouts.

The strategy was to stimulate and encourage adhesion to the restructuring offers through different means: (1) limiting repayment of non-participating defaulted securities, including by invoking the RUFO clause, which granted the holders of the 2005 Indenture Bonds the right to exchange their 2005 Indenture Bonds for any new consideration offered to the holdouts until 31 December 2014; (2) announcing its intention to avoid any and all payments under the defaulted securities not tendered in the restructuring offers; and (3) passing the Lock Law, which prohibited the government from making new offers and conducting any type of settlement with the holdouts, and approved the removal of all defaulted securities from listing.

After the Second Offer, Argentina had restructured approximately 92.4 per cent of the total amount of the defaulted securities, but a small group of belligerent holdouts led by the plaintiffs continued litigating to seek repayment of their defaulted securities and obtained final money judgments. Argentina 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 would be triggered only if Argentina made a ‘voluntary’ offer to purchase or exchange the defaulted securities. In our opinion, complying with the payments under a final money judgment does not constitute a ‘voluntary payment’, and to the extent that Argentina was adjudged to make payment in full in cash under those defaulted securities subject to the money judgments, it would have been allowed, therefore, to offer any other consideration that represented more beneficial terms for Argentina. Despite this, Argentina continued refusing to comply with the money judgments or to settle in any manner with the holdouts and continued litigating, even to the extent of violating the US District Court’s orders (for which it was held in civil contempt).

More than 15 years after the default, the new administration in Argentina that took office in December 2015 finally entered into negotiations with the plaintiffs and reached a settlement in less than four months, finally bringing the matter to an end.

After the Argentine default in 2001, the International Monetary Fund outlined the features of an improved Sovereign Debt Restructuring Mechanism (SDRM) in 2002. The most important element of the SDRM would be the ‘creation of a mechanism that would enable the affirmative vote of a qualified majority of creditors to bind the dissenting minority’.^[14] The best method to implement this restructuring framework would be the statutory approach, but because of the problems and complexities of adopting this approach in international sovereign debt restructurings, the trend has been focused on enhancing the collective action clauses.^[15] Argentina could have avoided the problems of its 2001 sovereign debt restructuring if its defaulted securities had included a collective action clause (as they do since the 2005 Indenture Bonds).

In 2011, Greece had to restructure more than €200 billion of sovereign bonds. Within only a few months, in March 2012, Greece successfully exchanged €77 billion in bonds for debt worth less than 75 per cent. However, the success of the Greek sovereign debt restructuring was mainly due to the fact that more than 90 per cent of its bonds were governed by Greek law and, therefore, were restructured through the enactment of domestic legislation that replicated the corporate insolvency voting mechanism for the bonds.

In February 2012, the Member States of the eurozone signed the Treaty Establishing the European Stability Mechanism to found the European Stability Mechanism. Pursuant to Article 12 of the Treaty, ‘[c]ollective Action Clauses shall be included, as of 1 January 2013, in all new euro area government securities’.

The fact is that now, after the Argentine sovereign-debt default and restructuring, as anticipated by the US Court of Appeals:

It 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.^[16]

After the 2005–2015 restructuring experience, Argentina implemented two of the lessons learned from the process: the use of collective action clauses in the 2005 Indenture Bonds and the 2016 Indenture Bonds (which would be tested for the first time in the 2020 restructuring) and taking a faster approach to the restructuring process, both in the opening of the negotiations with the creditors and the formulation of an acceptable proposal.

In the 2020 restructuring, Argentina intended to adopt two controversial measures to circumvent collective action clauses: (1) the redesignation, the aim of which was to change the voting pool after the votes had been cast, unilaterally changing the existing terms of the bonds indenture; and (2) the Pacman strategy, the aim of which was to aggregate the dissenting ‘redesignated’ excluded bonds, permitting a repetitive use of a ‘single-limb’ option to gather up non-consenting holders.

However, to achieve a successful restructuring, Argentina had to mitigate the effects of both measures. After mitigation and a minimal economic enhancement were effected, the government obtained consent for the restructuring from the holders of 99.01 per cent of the total principal amount of all series of eligible bonds (approximately US$64.8 billion).

Notes