Don’t Mess with Me, Argentina

Paul Singer resorts to privateering to collect on his hedge fund’s sovereign bonds

Often described as soft-spoken, mild-mannered and publicity-shy, Paul Singer, the plutocratic founder and head of $21 billion hedge fund Elliott Management, recently made quite a splash tracking down an historic Argentine sailing ship on a West African tour and convincing a Ghanian court to impound it.

Singer has writs from both US and UK courts entitling him to petition governments anywhere in the world to detain Argentine state assets such as the 103-meter, three-masted ARA Libertad, which the Argentine navy uses as a training vessel and which once held the world speed record for transatlantic crossings by sail.

The court judgments Singer has obtained are hallmarks of his decade-long pursuit of the Argentine government to collect on $300 million of defaulted, dollar-denominated 1994 Argentine bonds that his NML Capital fund – which specializes in distressed debt – scooped up at a deep discount in 2001.

Later that same year, Argentina defaulted on $100 billion of its 1994 bonds in what was, at the time, the largest sovereign debt default in history. It took nine years and two exchange offers – one in 2005 and another in 2010 — for Argentina and its bondholders to work out restructuring plans under which the defaulted bonds were swapped for new, longer-dated bonds worth 25-29% of par. Ninety-three percent of the defaulted bonds participated in the exchanges.

NML Capital rejected Argentina’s offers, along with another hedge fund specializing in distressed debt, Aurelius Capital Partners, and hundreds of Italian pensioners. Since 2001, Singer has made several attempts to attach Argentine state assets before he succeeded in detaining the Libertad. Argentina, meanwhile, has been making regular payments on its restructured bonds, but it has not been able to re-enter the global credit markets since its momentous default.

While the Libertad was being held in Ghana, Singer won a decisive legal victory here at home when the Second Circuit Court of Appeals in New York ruled that the pari passu clause in the fiscal agency agreement governing Argentina’s 1994 bond issue precluded it from making payments on its restructured bonds without also paying the holders of its defaulted bonds.

The Second Circuit then remanded Singer’s case to the Southern District court in New York to clarify how Argentina was to pay the two bondholder groups, and, last month, the Southern District ruled that Argentina must pay Singer and the other hold-outs the same percentage of what they are owed as it pays to the holders of its restructured bonds.

In its opinion, the Southern District rejected the argument that paying the hold-outs the full face amount of their bonds was unfair to the exchange bondholders. “In accepting the exchange offers of thirty cents on the dollar,” the court wrote, “the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating. Moreover, it is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes.”

“In accepting the exchange offers of thirty cents on the dollar,” the court wrote, “the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating. Moreover, it is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes.”

As it has been doing since 2005, Argentina intended to make its regular semi-annual debt service payment on its restructured bonds this month (about $3.3 billion), and so Paul Singer and the other hold-outs would then be legally entitled to 100% of what Argentina owes them. Since the unrestructured bonds are in default, their principal amounts have been accelerated and, with 11 years of accrued interest added in, NML Capital and Aurelius Partners are owed about $665 million each and the total bill for all the hold-outs would be approximately $11 billion.

Argentina could afford to pay Singer and Aurelius from its more than $40 billion of foreign currency reserves, but Argentine President Christina Fernández has vowed not to pay a single dollar to the “vulture funds”, regardless of any court ruling anywhere. Argentina’s Minister of Economy called the Second Circuit opinion “legal colonialism”.

Notwithstanding its defiance, Argentina now finds itself in a triple bind: if it pays the exchange bondholders and not the hold-outs, it will be in contempt of the Second Circuit court order; if it pays neither bondholder group, it will be in default of its 2005 and 2010 restructuring agreements; and if it pays the hold-outs the full amount of their bonds at any time, it will violate its own law prohibiting the offering of better terms than the earlier bond swaps.

This month, Argentina was able to persuade the International Tribunal for the Law of the Sea to order the High Court in Ghana to free the Libertad from Paul Singer’s clutches. Singer’s ability to detain the ship and procure the New York court opinions have nevertheless put Argentina and the rest of the world on notice that pari passu clauses in sovereign debt agreements are vulnerable to hold-outs.

In recent years, pari passu provisions have been replaced in sovereign fiscal agency agreements with ‘collective action clauses’ that provide for super-majority approvals of bond restructurings. In the wake of the New York court opinions, however, sovereign debtholders faced with deeply-discounted exchange offers may balk at CACs in the documents governing their bonds and hold out instead for par recoveries on their investments.

Argentina will get another chance to stave off Paul Singer and his band of hold-outs in two months when the Second Circuit hears arguments for and against the Southern District payment formula. If the appellate court upholds the Southern District, Argentina has indicated that it will take its case up to the US Supreme Court. If Argentina loses in that forum, Paul Singer’s next foray may be planting Elliott Management’s flag on Tierra del Fuego.

  • Derek Hunter

    If Argentina calls “vultures funds” to his legal creditors and “legal colonialist” to a accepted jurisdiction for his obligations, how we could call to the argentinian default?….”criollo corruption”?.

  • Robert Carhuayo

    Great and insightful article.

  • Francis Menton

    Good article and generally a fair summary of the situation. I would only disagree with the term “privateering” in the title. “Privateering” implies extra-legal measures, such as seizing ships on the high seas by private force; but here we have use of the legal system and court processes, which I think are the opposite of privateering. A panel of the Second Circuit has unanimously agreed with the hold-outs’ position on the pari passu clause, and it’s not hard to see why — if Argentina can pass a law saying that it will not pay the hold-out bonds even as its pays the exchange bonds, and that does not violate the pari passu clause, then the pari passu clause is deprived of all meaning.
    Good luck to Argentina in trying to go to the Supreme Court. I could be wrong, but I would not see the Supreme Court getting involved in a state law issue of contract interpretation such as the application of the pari passu clause. Possibly they might be interested in weighing in on issues of the Foreign Sovereign Immunities Act (which you do not discuss), but Argentina did waive sovereign immunity in the hold-outs’ bonds. An interesting question is why the Justice Department has felt the need to support (via amicus briefs) Argentina’s position on the FSIA issues, essentially asking the courts to delve into foreign policy when presented with what are otherwise pure contract issues.
    Readers may be interested in my blog post on this subject here:

    • Stephen A. Bornstein

      For the record, “privateers” are privately-owned vessels authorized by governments to attack and capture enemy ships during wartime.

    • Kevin Goldstein

      Stephen…excellent blog post. Francis….not only are you wrong on “privateering” but you also show poor form in promoting your blog on another’s.