Recent Financial Restructuring Developments in the Region: Argentina

Introduction

The purpose of this chapter is to outline the different tools that Argentine corporate debtors may have under Argentine law to restructure their financial obligations in the event of a distressed situation. Since the tools available are generally the same, we also cover liability management transactions that – at least in theory – differ from debt restructuring transactions in that they are initiated well in advance of a default situation and normally do not impose haircuts on principal. To this end, we focus mostly on the liability management and debt restructuring transactions that have taken place in Argentina in the years 2020, 2021 and 2022.

After the presidential primary election held in August 2019, which anticipated a defeat in the 2019 presidential election of the right-wing coalition led by President Macri, the Argentine economy entered into a political and economic crisis that forced the government to launch a mandatory reprofiling of local public debt^[2] and to impose foreign exchange (FX) regulations to protect international reserves.^[3]

The Fernández administration – which took office in December 2019 – reinforced the FX regulations already in place and launched a process to restructure the external public debt, which, in the view of the new administration, was not sustainable.

Further, in September 2020, the Argentine Central Bank issued Communiqué ‘A’ 7106, which imposed further restrictions on the repayment of external financial debt and foreign-currency-denominated domestic securities payable in foreign currency with principal maturing between 15 October 2020 and 31 March 2021 (subsequently extended to 31 December 2022). This new regulation imposed on corporate debtors owing external financial debt the obligation to file a restructuring plan with the Argentine Central Bank that required a reprofiling, refinancing or restructuring of at least 60 per cent of the principal due. This would be payable at a minimum average life of two years as a precondition to grant access to the FX market to pay the balance (40 per cent) of the principal due and payable. As a result, following the issuance of Communiqué ‘A’ 7106, Argentine corporates were able to postpone payments in foreign currency for approximately US$2.5 billion during 2020–2021.^[4]

This FX regulation, coupled with the recession in the economy caused by the covid-19 pandemic, created the expectation of a wave of court restructurings, holdout litigation and distressed debt trading that ultimately did not take place. As described below, most corporate debtors were able to negotiate amicable deals with their financial creditors mostly out of court, through pre-emptive liability management exchange offers.^[5] In many cases, as a trade-off to convince creditors to accept a reprofiling, debtors had to grant collateral or obtain third-party (affiliate) guarantees to make the (new) bonds more attractive.

The aim of the following sections is to provide a general overview of the options normally available to issuers of bonds (whether subject to Argentine or foreign law) when facing the need to restructure their financial debt, and to outline the main problems that each of these alternatives could present in practice.

Debt restructuring techniques

Background

In a situation of financial distress, an Argentine corporate debtor would normally have the following options:

• repurchase the outstanding bonds, although this is rarely seen, since a distressed debtor would usually lack sufficient funding;
• seek an amendment of the terms of the existing bonds;
• launch an exchange offer, which may include exit consents to amend certain terms of the existing bonds and a consent solicitation to agree to an extra­judicial preventive agreement (APE) proposal;^[6]
• launch a consent solicitation to agree to an APE proposal; or
• file for a concurso preventivo, a judicial reorganisation proceeding similar to a Chapter 11 proceeding in the United States.

Owing to the limited size of the Argentine domestic capital market, large Argentine corporates typically seek financing in international markets by issuing bonds under Rule 144A (which authorises the offer to ‘qualified institutional buyers’) or under Regulation S, to off-shore investors, governed by New York law. Although these US regulations exempt the issuance of debt securities from the US Securities and Exchange Commission’s registration requirements, this exemption is not applicable in Argentina (where the public offering would typically also take place to enjoy certain tax advantages), where the provisions of the Comisión Nacional de Valores (CNV) regarding the public offering of securities must be complied with. Therefore – in practice – the initiation of a liability management transaction or an out-of-court debt restructuring process involving an offer to exchange publicly held bonds or notes (known as negotiable obligations under Argentine law) would require the necessary interaction between US and Argentine regulations.

Finally, local debtors may also have issued local bonds governed by Argentine law in the domestic market and may (or may not) have bank debt subject to foreign law (typically when international banks are involved) or to local law (in the case of local banks).

Amendment of terms of bonds

To prevent or remedy any potential default situation, an issuer of bonds may seek bondholders’ consent to amend some of its terms. Generally, the terms of bonds include financial obligations (payment of principal, interest, etc.) and non-financial obligations, whereby a debtor has a commitment to perform (or not to perform) certain acts for as long as the bonds remain outstanding.

Until 2018, Argentine law required the unanimous consent of bondholders to amend the ‘essential conditions’ of bonds subject to Argentine law. Although Argentine regulations did not provide a definition (or specific examples) of bond terms that could be deemed ‘essential’ or ‘fundamental’, it has been understood generally that these conditions referred to the core financial terms of the bonds, such as those linked to their repayment conditions of principal and interest, and the maturity date, among other things.^[7] Therefore, the amendment (or waiver) of the terms and conditions of the domestic bonds could not affect any of the essential conditions (principal, interest, maturity date), which in practice meant that this technique would not necessarily bring financial relief to corporate debtors.

In 2018, the Productive Financing Law No. 27,440 amended the Negotiable Obligations Law No. 23,576 so as to authorise the inclusion of modification clauses (known as collective action clauses (CACs)) in bonds subject to Argentine law.^[8] CACs authorise a certain majority of bondholders to amend any terms of the bonds, making any such amendment applicable to all bondholders, including those that have not provided their explicit consent. As a result, issuers began including in their local bonds modification clauses (50 per cent or more of the aggregate outstanding amount of the existing bonds) and ‘super-majority’ provisions (normally, 75 per cent) to amend financial terms and certain essential non-financial terms, such as currency and place of payment, jurisdiction, governing law, release of guarantees and others.^[9]

However, most of the financial debt owed by Argentine corporates would typically have been issued under Rule 144A and under Regulation S, which – although not subject to the Trust Indenture Act (TIA) – in practice has traditionally mirrored the language of Section 316(b) of the TIA^[10] and, therefore, requires unanimity to modify principal or interest payments or payment dates in a way that may impair or affect debt holders. As discussed below, in recent years, certain Argentine corporates departed from this unanimity requirement and included modification clauses in their bonds subject to New York law.

Exchange offers

Description

An exchange offer can be defined as a mechanism whereby the issuer offers to issue new securities to the holders of existing debt securities in exchange therefor.^[11] The new bonds will typically contain a more favourable payment scheme aligned with the issuer’s financial capacity.^[12]

Exchange offers were typically the tool used by Argentine corporates in liability management and debt restructuring processes launched between 2020 and 2022. In many of these processes, Argentine debtors took the opportunity to include modifications clauses requiring a 50 per cent voting threshold to amend any terms of the new bonds, except for a list of ‘reserved matters’, for which a super-majority of 75 per cent of the outstanding existing bonds was usually required.^[13]

Other corporates adopted a much more aggressive approach and included simple majority CACs (50 per cent) to amend any matter, without imposing super-majority voting thresholds to modify financial matters.^[14]

With regard to bonds issued under New York law, despite the general reluctance of the US market to accept majority modification clauses,^[15] certain Argentine issuers were also able to include CACs in the new bonds subject to New York law issued during this period (2020–2022). For instance, CLISA (Compañía Latinoamericana de Infraestructura y Servicios SA) included a clause in its Exchange Offer Memorandum and Consent Solicitation Statement dated 15 July 2021, which allows for amendments of certain ‘economic’ terms of its New York-governed bonds, provided that any amendments are made with the consent of the holders of at least 75 per cent of the principal amount of the outstanding bonds.^[16] Likewise, EDESA SA and Genneia SA included in their exchange offers (made in March and August 2021, respectively) a similar provision that authorises the amendment of ‘fundamental conditions’ of their bonds governed by New York law with the consent of at least 75 per cent in aggregate of the outstanding principal amount of the new notes.^[17] In 2022, Mastellone Hermanos SA and IRSA Inversiones y Representaciones SA included CACs in their exchange offers that required the affirmative vote of holders of not less than 75 per cent and 90 per cent, respectively, of the outstanding principal amount of the new notes in order to approve changes to certain essential conditions of its New York law bonds.^[18]

Exchange offers and exit consents

Despite the 2018 amendment to the Negotiable Obligations Law that authorised issuers to include modification clauses in the terms of local bonds, in 2020 the vast majority of bonds issued by Argentine corporates did not include CACs. Therefore, Argentine corporates had to resort to another tool generally available in the international markets to induce bondholders to tender their bonds: namely, exit consents.

Exit consents are consent solicitations to amend certain terms of existing bonds to make them less attractive to bondholders.^[19] They have a solid economic justification: payments that the issuer will have to make to holdouts will ultimately derive from the funds that will not be paid to the bondholders that have agreed to the exchange offer. To tackle this problem and avoid the potential issue of bondholders deciding to withdraw their consent if there is a high percentage of holdouts, exit consents balance the field by showing bondholders that they will not be better off by keeping their old bonds with the protections stripped away.

By using this technique, consenting bondholders would agree to eliminate most of the debtor’s non-financial terms, such as the negative pledge, the limitation to take on debt or to dispose of the debtor’s assets, cross-default provisions, the limitation to make certain restricted payments or transactions with affiliates, and certain events of default, among other things. Further, consenting bondholders would agree to modify certain provisions of the existing bonds to make it more difficult for holdouts to litigate in the case of default, for instance increasing the percentage of consents required to accelerate the bonds in the event of default or decreasing the percentages needed to remedy a default.

Exit consents are essential if the issuer would need to assume more debt or pledge certain assets as collateral for the new bonds that would be given to the bondholders that accept the exchange offer. Taking into account that in most cases the ‘old’ bonds will contain provisions that prevent the debtor from taking on debt or encumbering its assets (negative pledge), exit consents are instrumental in releasing the debtor from these restrictions and completing the exchange offer without breaching the terms of the ‘old’ bonds.

Exit consents under Argentine law

Argentine debtors have widely used the exit consents technique in liability management transactions between 2020 and 2022. Generally, an exchange offer would be subject to certain conditions, including that (1) the offer is accepted by a minimum percentage of the bondholders, and (2) each bondholder accepting the offer also gives its consent (either through a resolution at a bondholders’ meeting or any other means provided for in the bonds’ issuance terms) to waive certain covenants undertaken by the issuer that protect the latter’s solvency and capacity for payment or to amend certain terms of the old bonds, so as to make them less attractive.

As an example, Genneia SA’s Exchange Offer and Solicitation Memorandum dated 2 August 2021 provided that each bondholder accepting the exchange offer must consent to the implementation of certain amendments to the ‘old’ bonds, such as (1) the deletion of a series of covenants, including the issuer’s obligation not to exceed certain limits regarding debt, restricted payments, asset sales and transactions with affiliates, among other things, (2) the deletion of some events of default, including the failure to pay any indebtedness or a final judgment in excess of US$20 million, and (3) the increase from 25 per cent to 85 per cent of the percentage of the principal amount held by the holders that may accelerate the existing bonds upon the occurrence of an event of default.^[20]

Currently, there is a wide consensus on the legality under Argentine law of exit consents used to waive or eliminate non-financial and non-essential terms of the bonds, such as the above-mentioned Genneia example. However, it remains unclear – and there are no court precedents – whether the amendment of essential financial terms or of certain essential but non-financial provisions – as the jurisdiction or the governing law – through exit consents would be legal under Argentine law.^[21]

The abrogation of the unanimity requirement by the 2018 amendment to the Negotiable Obligations Law No. 23,576 appears to have opened the door for the use of exit consents to amend not only non-financial terms but also financial (i.e., essential) conditions, unless restricted by the terms of bonds. However, it is uncertain whether this type of exit consent would be admissible under Argentine law. Since Argentine issuers have only recently started to include CACs in their bond terms, there are no cases of exchange offers with exit consents for the purpose of amending financial terms of the existing bonds.^[22]

Further, it is also unclear whether – through an exit consent technique – the consenting bondholders may incorporate in the old bonds’ terms a majority provision that would, for instance, facilitate the conversion of bonds to equity or would authorise a sale of the debtor’s assets to a newly formed company, which, in turn, will issue ‘new’ bonds that will be offered to bondholders that would agree to the exchange offer as a replacement of the ‘old’ bonds, thus leaving the original issuer (the debtor of the holdouts) as a shell company without assets.

In our opinion, when the facts indicate a violation of the good faith principle^[23] or an abuse of rights by the majority,^[24] courts would be inclined to accept a challenge by bondholders to an out-of-court exchange offer with exit consents aimed at modifying the essential terms of existing bonds to the detriment of non-consenting bondholders without a clear business justification. This is true particularly when – as is the case with exit consents – the required majorities are reached with the affirmative votes of those bondholders that would have already agreed to participate in the exchange and, therefore, would not be bound by the modified (and adverse) terms of the existing bonds.

It should be noted, however, that this type of case is unlikely to occur in Argentina as, typically, debtors who fail to get strong support from bondholders through an exchange offer with exit consents would opt to complete their restructuring through an APE, which – as explained below – once judicially approved, would bind dissenting bondholders. However, there are certain issuers – most notably, banks – that are not eligible under Argentine law to execute an APE agreement^[25] and, therefore, one cannot rule out the possibility that, in a distressed situation, this type of non-eligible debtor may decide to resort to an aggressive approach with exit consents to modify the financial terms of existing bonds.

Exchange offers and APE

As an additional tool to obtain conclusive support from bondholders,^[26] debtors may add to the exchange offer a solicitation of consents to approve certain amendments to the terms of the existing bonds and also – if so decided by the debtor and provided certain conditions are met – to execute an APE, through a power of attorney granted in favour of an agent. An early participation consideration – in the form of cash or through additional new bonds offered in exchange – would normally be offered to the bondholders that agree to tender their bonds prior to a specific date.

Whether the debtor would proceed with the execution of the APE would depend on the level of consents that its exchange offer has received. If a high percentage of bondholders, say 95 per cent, have agreed to the exchange voluntarily, the debtor may execute the agreed amendments to the non-financial terms of the existing bonds, for the purpose of making the existing bonds owned by the non-consenting bondholders less attractive. In this situation, both the existing (old) bonds and the new bonds would survive and – in due time – the debtor would have to pay the old bonds.

In other cases where the exchange offer would get a lower level of support, but more than the minimum voluntary participation rate for the exchange typically stated in the offer,^[27] then the debtor would execute the APE with the agent voting on behalf of the consenting bondholders and – once approved by the court – all ‘affected’ creditors (both consenting and non-consenting bondholders) would be bound by the restructuring terms and, therefore, a mandatory exchange of bonds would take place and the old bonds would cease to exist.

For the APE to get court approval, certain documentation relating to the assets and liabilities of the debtor and certified by a public accountant^[28] must be filed before a competent court. Further, the APE would have to be agreed by unsecured creditors representing (1) more than 50 per cent of all unsecured creditors, on a head count basis, regardless of the amount of their claims, and (2) not less than 66.66 per cent of the aggregate principal amount (plus any accrued but unpaid interest) of any unsecured debt.^[29]

Although the creditors that have voluntarily agreed to the restructuring support agreement would normally be contractually restricted against initiating or continuing legal actions against the debtor,^[30] such a stay would not be applicable to non-consenting bondholders, which may try to jeopardise the process by filing legal actions.

Neither the signing of the APE nor its filing with the court would have the effect of staying holdouts, which may seek an injunction to stop the exchange offer process before the New York^[31] or the Argentine courts or, if a principal or interest payment has been missed, may seek a court order to seize assets of the debtor. This type of legal action may continue until the stay enters into effect, which would happen after the court is satisfied that the APE legal requirements have been complied with and it orders the publication of the APE notices.^[32]

Certain creditors are not counted among those that have voting rights and, therefore, are excluded from the creditors on which the majorities are calculated. Normally, the bonds’ terms would exclude from the calculation all bonds owned directly or indirectly by the issuer or any of its affiliates. Further, Article 45 of the Argentine Bankruptcy Law provides that, in the case of corporate debtors, creditors that are controlling shareholders shall have no voting rights and their claims shall not be taken into consideration.^[33]

The consent of debt holders must be given at a validly convened meeting of holders, with the required quorum present, or through any other means set forth in the bonds’ terms and conditions. At this meeting, consenting bondholders would be represented by an agent as per the authorisation and power of attorney granted in the consent solicitation.

Once validly summoned, the provisions of the Argentine Bankruptcy Law will prevail over the terms and conditions of the applicable series of notes for the purposes of determining the requisite majorities for the approval of the APE. These provisions establish the following rules: (1) to calculate the headcount majority of creditors, all the votes of holders supporting the APE will be considered as cast by one person and all the votes opposing the APE will be considered as cast by one person,^[34] regardless of the actual number of holders voting for or against the APE, and (2) to determine the majority in terms of capital, the aggregate principal amount of any of the debt securities consenting to the APE will be calculated. In this regard, it should be noted that, pursuant to legal precedents, the principal amount of the debt securities represented by holders not present at the holders’ meeting and of any holders abstaining at the meeting will be excluded from the calculation of the capital majority.^[35]

According to Section 75 of the Argentine Bankruptcy Law, creditors that have not consented to the APE may file a legal objection within 10 days of the last publication of public notices. This legal objection may only be sustained on omissions or misstatements of the asset or liability concerned, or the non-existence of the majorities required under Section 73 of the Argentine Bankruptcy Law. If necessary, the court will order evidence to be produced within a term of 10 days and will resolve the objection within 10 days of the end of the evidence period.

Once the APE receives court approval, its terms become binding on all unsecured creditors whose claims are included in the APE restructuring proposal, whether or not they have consented to the APE. The APE court approval causes the novation of all prior obligations included in the APE.

Typically, once the court approves the APE and that decision becomes final and non-appealable, the exchange would take place and the new bonds would be issued and delivered to all bondholders. It is possible, though, to structure the APE so as to implement the exchange and issuance of the new bonds to the consenting bondholders at a certain date prior to the court approval, provided that a certain percentage of consents have been received (referred to as the ‘voluntary exchange date’). In these cases, non-consenting bondholders would receive their new bonds at a later stage when the court grants court approval to the APE. That decision is final and not subject to appeal (referred as the ‘court confirmation exchange date’).

Recent experience

Exchange offers with consents solicitation and powers of attorney granted by consenting bondholders to execute an APE agreement were used in the liability management transactions of EDESA (2020) and CLISA (2021).^[36]

As the calculation of the required majorities for the APE must take into account the affected unsecured creditors (Argentine Bankruptcy Law, Article 73), among the challenges that Argentine debtors may face – particularly when the exchange offer follows a liability management transaction in which the debtor had to offer collateral to convince the consenting bondholders to accept the new (secured) bonds – are the interaction between secured and unsecured bondholders and the risk of having holdouts in both types of bonds.

Another potential problem is the interaction between the applicable laws regarding the bonds (negotiable obligations). Notwithstanding that New York law would govern most of the matters as normally stated in the indenture, the bonds are also ‘negotiable obligations’ subject to Argentine law and, therefore, the Negotiable Obligations Law would apply.^[37]

If the consents are sought through a meeting of bondholders, the bondholders face the risk that certain decisions not included on the list of reserved matters are adopted by a small majority of bondholders (i.e., 50.1 per cent) that are present at the meeting, as authorised by Section 14 of the Negotiable Obligations Law and Section 354 of the General Companies Law. In effect, Argentine law allows for bondholders’ extraordinary meetings to be regarded as legal with at least 60 per cent of the bondholders present in the first call, and at least 30 per cent of the bondholders present in the second call. Once a quorum is achieved, the bondholders’ meetings may adopt any decision by a majority of the bondholders present, which may be a very low threshold if non-consenting bondholders fail to attend the meeting.^[38] To guard against this risk, bondholders would normally negotiate that all relevant matters be included on the list of ‘reserved matters’. Such an amendment would require a super-majority (i.e., 75 per cent) calculated from the outstanding amount of existing bonds, not just those present at the meeting.^[39]

Concurso preventivo

If a distressed debtor fails to receive sufficient support from its financial creditors to proceed with an APE, it would have no choice but to file for concurso preventivo.

Once the procedure is opened – after the filing requirements have been complied with – the stay would be applicable to all pre-petition creditors and the debtor would remain in possession subject to the supervision of the receivers and the oversight of a creditors committee composed of the three largest unsecured creditors, as appointed by the court. The law prevents the debtor from repaying its pre-petition claims and requires court authorisation to perform any act outside the ordinary course of business.

Unlike Chapter 11 of the US Bankruptcy Code, the automatic stay granted by the opening of a concurso preventivo – which acts retroactively to the filing date – does not automatically apply to secured creditors holding security interests. Normally, these creditors may initiate or continue with their legal actions; however, they cannot foreclose on the collateral until they have filed their proof of claim with the receiver, except for those creditors holding security interests that allow non-judicial foreclosure (e.g., a pledge of shares or collateral trusts), which are entitled to continue with the foreclosure but must notify the court of the date on which the foreclosure shall take place and must file a statement of accounts disclosing the proceeds obtained within 20 days thereafter. In certain specified situations, and for a limited period, the Argentine Bankruptcy Law authorises the temporary suspension of auctions and of precautionary orders that preclude a debtor from using any of its encumbered assets based on the need and urgency for the debtor and the estate.

The same majorities stated above (an absolute majority of the unsecured creditors and two-thirds of the total outstanding amount of the unsecured claims) apply to a reorganisation plan filed under a concurso preventivo. In certain cases, the court may still approve a plan if it (1) was approved by (a) at least one of the affected classes of unsecured creditors and (b) unsecured creditors representing at least three-quarters of the aggregate outstanding unsecured claims that voted for the plan, (2) provides at least liquidation value to dissenting creditors and (3) does not provide for discriminatory treatment among classes.

Bondholders’ consents shall normally be obtained through bondholders’ meetings that must be called by the court or the company, according to Article 45 bis of the Argentine Bankruptcy Law, with the same exclusions that are applicable under an APE, as described above.

When the required majorities are not met, Article 48 of the Argentina Bankruptcy Law contemplates a special procedure to avoid bankruptcy liquidation (quiebra), which is applicable to corporates and other eligible debtors. This procedure – known as salvataje or ‘Argentine cramdown’ – opens a ‘second round’ proceeding, during which any party (including the debtor, its shareholders, third-party affiliates or non-affiliates, as creditors) is entitled to propose a new plan to the creditors. The first party that obtains the required consents (two-thirds in capital and a majority in the number of creditors) is entitled to take control of the debtor, with the current shareholders being obliged to transfer the equity interests to that party.

If the court concludes that the debtor’s equity interests have a positive value, the third party will need to pay (or guarantee) the positive value net of the debtor’s liabilities as per the terms of the plan to be approved. If the court concludes that, owing to the scale of the liabilities, the equity interests have no value (or a negative value), the third party has the right to acquire the equity interests without any further payment or consideration.

After the local filing, a debtor with foreign-located assets or foreign creditors would typically initiate a bankruptcy recognition proceeding in the foreign jurisdiction, which would typically be the United States. US courts have usually granted recognition to APE filings made by Argentine debtors after confirming that the Argentine Bankruptcy Law complies with the requirements stated in Chapter 15 of the United States Bankruptcy Code. There are several instances in which US courts have granted this recognition.^[40]

Conclusions

Despite Argentina’s economic crisis and FX restrictions – aggravated by the covid-19 pandemic – most Argentine debtors have been able to negotiate amicable out-of-court deals with their financial creditors through pre-emptive liability management exchange offers. In many cases, as a trade-off to convince creditors to agree to the debt exchange, debtors had to grant security interests on certain assets (such as export receivables or shares in subsidiaries) or obtain third-party (affiliate) guarantees to make the (new) bonds more attractive.

Although the presence of modification clauses may have facilitated the outcome of the liability management transactions during 2020, 2021 and 2022, the reason for the high level of creditors’ support that these transactions received is not attributable to CACs, as the New York law bonds issued by Argentine debtors generally required unanimity to modify financial terms if detrimental to bondholders. However, as explained above, this bondholder-protective approach has started to change and several Argentine corporates were indeed able to include super-majority provisions in their local and New York bonds issued in liability management transactions between 2020 and 2022.

It remains to be seen whether this trend of amicable out-of-court debt restructuring becomes the prevailing mechanism in forthcoming financial distress situations involving publicly held debt securities – now with CACs – that Argentine corporates would probably have to renavigate sooner rather than later.

Notes