Sovereign Debt: Law That Approves Payment to Holdouts

1. Background

The current Administration, which took office on December 10, 2015, reinitiated negotiations with creditors who did not accept to enter into the 2005 and 2010 restructuring (the “holdouts”). Within the framework of such negotiations, the Executive Branch submitted a bill to approve the settlement of the debt in default since 2001 (the “Debt”). The bill was passed by both Houses of Congress and was enacted as Law No. 27,249 on March 31th, 2016, which was then published on the Official Gazette on the following day (“Law 27,249”).

The negotiations conducted by the Argentine Government contemplate the execution of settlement agreements with certain creditors who sued the country before foreign courts, including the holdout creditors that obtained favorable judgments in re: “NML Capital, Ltd. vs. Republic of Argentina” (the “NML Case”) and the so called “me too” creditors —whose cases are still ongoing before the courts of New York—.

The enactment of Law 27,249 by the Executive Branch  constitutes a very important step towards the potential lifting of the injunctions issued in the NML Case and other related legal proceedings. In practice, such injunctions (derived from the interpretation of the pari passu clause included in the defaulted bonds) currently prevent Argentina from making payments under its restructured debt if the country does not pay —before or simultaneously— all the amounts owed to the plaintiffs under their defaulted bonds.

These injunctions have had a significant impact on the payments scheduled under the restructured bonds. For a description of the background and the relevant decisions issued by the US courts in the NML Case, please see our previous articles published in Marval News No. 131, 133, 140, 141 and 154.

2. Main provisions of the Law No. 27,249

Law 27,249 provides for the abrogation and amendment of several laws, as well as the approval of the settlements agreements reached with some holdouts and also provides guidelines for the performance of the Ministry of Public Finance (the “Ministry of Finance”).

A. Abrogation of legal provisions that prevented the agreement with the holdouts

In order to cancel the Debt, Law 27,249 abrogates all those laws that prevent the payment to the holdouts in the terms agreed upon in the negotiations conducted in the last months: Law No. 26,017 (the “Lock Law”), Law No. 26,547 and Law No. 26,886 (the “Laws Suspending the Lock Law”), Law No. 26,984 (the “Sovereign Payment Law”) and any other provision that is contrary to the new Law.

The Lock Law (enacted on February 10, 2005) specifically prevented the Executive Branch from reopening the exchange process and executing any kind of transaction related to the defaulted bonds after the closing of the 2005 Exchange. The Laws Suspending the Lock Law were passed to allow the reopening of the exchange: Law No. 26,547 was passed in late 2009 to launch the exchange in 2010, while Law No. 26,886 was passed in mid-2013 to launch a third exchange offer aimed at the restructuring of the remaining defaulted debt (that included approximately a 7% of the aggregate amount) —which was never implemented—.

The Sovereign Payment Law (enacted on September 10, 2014) was passed as a result of the pari passu injunction, which became effective as a consequence of the denial by the Supreme Court of the United States in relation to Argentina’s petition for a writ of certiorari. The aim of the Sovereign Payment Law was to remove The Bank of New York (as trustee under the restructured bonds issued in 2005 and 2010 exchanges, which has been replaced by the Argentine entity Nación Fideicomisos S.A.) and to allow the exchange of the restructured bonds by new bonds subject to a law other than New York law, for the purposes of preventing that the payment of interests scheduled for September 30, 2014 would be subject to the injunction issued in the NML Case. However, such exchange was never implemented.

B. Approval of agreements reached with creditors

Law 27,249 also provides the approval of certain settlement agreements entered into with many creditors to cancel the Debt (the “Agreements”). It is provided that these Agreements will be valid “…as from the confirmation by the Court of Appeals for the Second Circuit of the United States of America that all the injunctions [issued against Argentina] have been effectively lifted…”.

If this condition is not satisfied, the Ministry of Finance is authorized to negotiate new agreements with the holders of the Debt. Such agreements must be approved by the Congress.

Law 27,249 provides the issuance of bonds and the engagement in other public credit operations for the purposes of carrying out the payments settled in the Agreements to cancel the Debt. In this regard, it is set as limit the amount of AR$ 12,500,000,000 (or its equivalent in another currency). If the amount of issuance exceeds the payable amount, it is provided that the surplus will be allocated to the existing authorization for public debt provided in the Law which approved the General Budget of the Federal Administration for 2016 (the “Budget”).

Law 27,249 establishes that in order to participate in the debt cancellation transactions, the holdout creditors who enter into the Agreements shall waive all their rights (even those recognized by any judicial or administrative ruling, arbitral award, or by any other decision), and they must also waive and release Argentina from any other legal action initiated or to be initiated in relation to the defaulted bonds.

The Ministry of Finance is authorized to amend the Agreements (as long as their object, economic conditions and terms and conditions are not modified) and to negotiate and settle with those holdout creditors who are not yet included in the Agreements. As to these creditors, the Ministry of Finance is authorized to make two kinds of offer:

1. “Base Offer”: aimed at all holders of defaulted bonds, it comprises the payment of the principal amount owed under the bonds plus a 50%, which limit is the amount recognized by ruling, if any (plus the judicial interests accrued as of January 31, 2016)[i]. The Base Offer will be implemented by signing the corresponding cancellation agreements and by the payment in cash upon the delivery of the bonds (cash tender offer).
2. “Pari Passu Offer”: aimed at those holders of defaulted bonds reached by the pari passu orders (i.e., to those included in the judicial rulings issued by Judge Griesa in February and November, 2012, and in October 2015 —that is, the plaintiffs in the NML Case and the “me too” creditors), who will be able to choose between the Base Offer and the Pari Passu Offer. The Pari Passu Offer will vary depending on if creditors have (or do not have) a monetary judgment before February 1, 2016:
   1. Those creditors with monetary judgement as of such date will be offered a payment equivalent to the 70% of the claim, which includes the amount of the ruling and the judicial interests as from the ruling and up to January 31, 2016; and
   2. Those creditors with no monetary judgement as of such date will be offered a payment equivalent to the 70% of the claim, which includes the amount owed, plus the contractual interests and those interests according to the statutory interest rate until January 31, 2016.

C. Additional provisions

Law 27,249 grants other powers to the Ministry of Finance and sets guidelines to act in this matter.

The Ministry of Finance is authorized to: (i) subject the Republic of Argentina to a foreign jurisdiction and provide the waiver to the defense of sovereign immunity (only with respect to agreements and debt issuances implemented according to the new Law, and as long as they include collective action –CAC- and pari passu clauses); (ii) carry out all the necessary acts in order to comply with the provisions of the new Law (for instance, to determine the dates and terms to participate in the offers for the cancellation of debt, to appoint the financial institutions that will participate in the offering of the new bonds —whose fees shall not exceed a 0.2% of the issued amount—, and borrow from other public loans, among other acts); (iii) to adopt the necessary measures within a 60 day term to normalize the payments of the bonds issued in sovereign debt restructuring in 2005 and 2010 exchanges; and (iv) extend the expiration terms of the cancellation debt agreements; among other powers.

The new Law also amends Section 42 of the Budget (authorizing the Ministry of Finance to continue with the normalization of the debt services and imposing the duty to send quarterly reports to the Congress on the negotiations and agreements executed) and empowers the Chief of the Cabinet of Ministers to carry out budget adjustments in order to comply with the provisions of such new law.

D. Bicameral Committee

The new Law creates the Permanent Bicameral Committee for the Monitoring and Control of the Contract Management and Payment of the Sovereign Foreign Debt, which will be comprised by ten (10) Senators and ten (10) Representatives (respecting the proportion of the political parties). The function of this committee will be to assess, manage and pay the foreign debt of the country, for which it may request reports, documents and information to banks and national, provincial or municipal agencies, whether public or private, as well as to any other body or agency.

E. Public policy – Entering into force

Law 27,249 states that its provisions constitute public policy and entered into force on April 1st, date of its publication in the Official Gazette

3. Final comments

The discussed Law constitutes a major step forward towards the ending of the conflict with the holdouts, which has lasted for more than a decade.

Its entering into force allows the Republic of Argentina to restart making payments to all the holders of the bonds restructured in 2005 and 2010.

According to the ruling issued by Judge Griesa on February 9, 2016, subject to the abrogation of the laws which prevented the execution of settlement agreements with the plaintiffs of the NML Case (including the Lock Law and the Sovereign Payment Law) and to the full payment by the Republic under the terms of the Agreements (both as conditions precedent), the Judge will vacate the injunctions issued within such case based on the pari passu clause, which would enable the Republic to make payments under the restructured bonds without being obliged to comply with the pari passu injunctions which obliged to make ratable payments to plaintiffs.

Given the economic and legal relevance of the conflict with the holdouts, and the effects that the judicial proceedings and the measures ordered within such proceedings have had on Argentina’s access to foreign credit, it will be important to follow closely the implementation of its many aspects and its potential implications and effects, both in Argentina and abroad.

[i] For those bondholders who have filed class actions with the courts of New York, the Bill authorizes to agree an additional amount (not specified) for payment of judicial serving expenses.