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Argentina: Judge Griesa hates listening to Jackson Browne

 
 
Setting the stage for a Shakespearean Tragedy of Errors?
 
Today the US District Court Judge Griesa held yet another hearing in the pari passu litigation between Argentina and holdout creditors. The key interest of investors crowding the court room was to hear the judge to explicitly spell out whether the stays on the injunctions against Argentina and third party financial intermediaries (BoNY in particular) would be lifted or extended (and by how long).
 
Indeed, while it is important for investors to keep an eye on the forest ahead (feasibility of implementing injunctions, prospects for the ruling to be reheard and overturned, or Argentine reactions, like re-routing payments) there are too many near term distractions. Indeed, the market is focused on the tree ahead because given that obscure legal technicalities, or an operational blunder or a temperamental political decision (or a combination of the three) can constitute the weakest link in a chain obstructing Argentina's payments to third party holders of restructured (foreign law) bonds due in December.
 
Although what you might read immediately below is negative on the surface (uncertainty over technical default in December was not been eliminated), it is fair to say that the stays on injunctions are likely to be extended during next month (albeit possibly in a nerve-wrecking peace-meal fashion). If so, this would allow payments on December coupons to remain exempt from suffering pro rata for as long as the Appeals Court is inclined to debate (any guesses?) the legality, consistency and consequences of executing the injunction on the NY's financial payment institutions.
 
Griesa's extension of the stays: Gangnam-style?
 
The Judge:
 
1. Extended the stays until December 1st. Bad news for bond market. This is 1 day before the $40 million payment on Rep Arg 17s is due—which for practical matters leaves the bondholder trustee (BoNY) not knowing until the last minute whether their reception of payment by Argentina and/or their processing of payments to registered holders would put them in contempt of court or not. One could almost imagine the BoNY lawyers (sitting at the front of the courtroom in utter silence) humming to themselves a that (briefly) #1 American classic from the 60's which, like many doo-wop tunes, nobody admits to ever having sung or liked(1).
 
2. Committed to deliver a ruling by December 1st clarifying (a) the pro rata formula and (b) the set of financial intermediaries affected by injunctions (both requested in the Appeals Court). Bad news for bond market. The judge wants to expedite the proceedings which raises the risk of a hasty response by Argentina or BoNY which raises the risk for restructured bondholders of suffering a "technical default" and one that affects upcoming coupon payments rather than those due down the road.
 
Regarding the above, in response to an observation from the defense, Judge Griesa discredited the idea that somehow his rulings should be sensitive to the (negative) impact on the bond market. So much for the power of that idea to insure bond investors against sleepless December nights (yes, sometimes Judges rule on principle and not just out of fear of unknown financial consequences).
 
3. Acknowledged that he would consider extending the stays further on December 1st. Good news for bond markets. The Judge leaves the door open to following his (and everyone else's) common sense suggesting that a stays will be extended until legal process. Litigating holdouts did seek to have the judge lift the stays immediately, but Griesa made it clear that doing so made no sense as long as the judicial process remained incomplete.
 
Note that in this litigation process potentially involves the Appeals Court rehearing of Griesa's ruling and its own issuance of a complete ruling (the current one is incomplete), a subsequent request and rejection or ruling of an en banc hearing, and subsequent request and rejection or ruling of a cert petition.
 
A tense December: Peru, de-ja-vu?
 
The bottom line then is that the judge made it clear that he will not undermine the due process underway at any point by lifting the stays in a precipitated fashion. But at the same time he seems prone to exercise his full discretion to grant stays on an ongoing basis and each time he does so he will do so only for a period that frees Argentina and BoNY from uncertainty during the next single-step of that legal process. Independent of the end-game in this litigation (a very important issue notwithstanding), this decision by the Judge represents a partial victory for holdout creditors. In similar circumstances the latter have benefited when sovereigns like Peru could not handle the pressure and chose to blink (paying off defaulted claims ahead of an performing debt obligation) in their benefit rather than continue an appeals process.
 
We think Argentina is not Peru—and therefore will prefer not blink (settling for an upfront par payment to holdouts, i.e. the most adverse version possible of the pro rata formula)... even if not blinking implies (among other scenarios) risk of incurring in "technical default" on 25% of Argentina's bonds outstanding (see tables below). But in today's world populated by CDS contracts, investors can simultaneously hold bets that benefit if and when Argentina chooses NOT to blink like Peru. In that position investors would also benefit if BoNY loses its nerves and blinks (i.e. by refusing to receive payments on restructured debt from Argentina or, once received, refusing to pass them on to beneficial holders in EUR and JPY securities or to registered holders in USD securities).
 
Investors need nerves of steel to get through this December with their sanity intact. Obviously the market offers a better risk-reward proposal for current holders of GDP warrants who in December will get paid up to 2/3 of its current market price (and retain valuable optionality thereafter) than it does for Rep 17 or Disc 33 holders. And markets offer opportunities for local law bond holders that love high yields more than they care about mark to market volatility. But for Rep 17s and Disc 33 holders, the Christmas holidays threaten to deliver large packages with crash-courses in legal, back-office and political psychology but limited financial gratification.
 
Yet is the pressure pot simmering hot for Argentina as well due to Judge Griesa's decision to leave the extension of the stays beyond December 1 to his discretion? Note that one last resort option that Argentina (and BoNY) can exercise ahead of any payment to restructured bond holders is to "wait and see". After all, bonds are understood to carry a 30 day grace period to remedy a non payment before it formally becomes a default, bonds are accelerated, CDS is triggered (and the gates of hell are opened).
 
What's next?
 
Judge Griesa requested additionally briefings. Here is the (expedited) timeline he laid out:
 
Nov 14: Plaintiff to file briefs
Nov 16: Argentine Defense to file brief + third parties (amicus) briefs + affidavit from Arg government (see below)
Nov 19: Plaintiffs to file reply
Dec 1: District Court ruling (on 1. pro rata formula, 2. financial institutions affected) + consideration of petitions to extend stays "while C. of A. does further work."
 
With respect to briefs: In addition to Argentina's brief, on Nov 16 one should expect a brief from BoNY (explaining in a detailed fashion their sad predicament) and some restructured bondholder investors (that do not care to sit passively in the cross-fire between Argentina and litigating holdouts). More importantly, we will be watching if US government files or not an amicus brief. (From the memory of one very acute mind on pari passu: in 2003 the Fed characterized holdouts interpretation of pari passu as "payment system terrorism." This stands in contrast to what (our reading of) the 2012 brief from State Dept. interpreted in a more technical, less apocalyptic form... probably, we would hold, because no large EM economy is vulnerable to default today as Brazil was in 2003 and because in 2003 CACs did not exist and now they do... even when it is worthwhile to recall that lack of aggregation does render them very imperfect).
 
With regards to stays: Surprisingly (at least to yours truly, a non-lawyer), Judge Griesa said that the extension of stays "will depend on the what comes out of the ruling" rather than saying what one might have expected: that an extension depends on the merit of arguments in the petition briefs. Does this mean that the Judge is unsure whether the decision he anticipates he will be making will be legally bullet-proof or if it may remain controversial and hence, its execution problematic?
 
A positive consideration for Argentina: at one point Griesa also said that: one of the things on his mind, "subject to what the Court of Appeals says," is that plaintiffs are entitled to money (not IF, but HOW MUCH). He made this point in explaining why he did not extend the stays until March (when more coupons on Argentine debt come due)—an option that restructured bondholders would argue helps to reduce the margin for a potentially regrettable responses (panic from BoNY or excessive passion from Argentina). Griesa appears to be acknowledging that the Court of Appeals will need to convene and finalize its ruling (although holdouts tried to argue that the prior ruling constituted a formal "mandate" from C. of A. which Griesa disregarded as a technicality he would not address).
 
With regards to affidavit: As a colorful side-note (?): Judge Griesa was furious at the knowledge that in recent public statements Argentina's President and Economy Minister said that Argentina would never pay holdouts anything while continuing to pay restructured debt in full, thus evading the District and Appeals Courts' (currently incomplete) rulings. So alongside the briefing from all parties he expects to receive in short, he requested an affidavit from Argentine authorities (not their lawyers) stating that they will respect and note attempt to evade the US Court's orders.
 
He emphasized that Argentina had subjected itself to US jurisdiction and made a point to note that until now Argentina had actually been a beneficiary of almost all of the final rulings in US Courts involving holdouts and that this one was an exception. For every observer of the pari passu litigation that feels exhausted from mopping up more technicalities than desired, this request promises to offer an interesting read (not to mention, the wagers over which Argentine government official dares sign it—and lives to keep his/her job the next day).
 
The million $ question: Are the injunctions an Emperor without clothes?
 
In a nutshell, while Judge Griesa's (very purposely) left Argentina, BoNY and the market to confront uncertainty over the extension of stays beyond Dec 1 (which is actually what has any practical relevance) he said in more than one way that (a) he understands stays cannot technically expire if a judicial process is not complete and that (b) he understands that the Appeals Court has more work. Taken together, it seems reasonable to expect the odds to favor (as long as the C. of A. is looking into the case) an extension of Griesa's stays come December 1st... but then, maybe only until December 14... and then, once again... but maybe only until December 30...
 
A lot of market participants are converging to the belief that while Griesa is showing a bias to expedite the process, the Appeals Court's own request for clarification to that Judge (regarding the pro rata formula and the set of financial intermediaries affected by injunctions) implicitly reflects a concern about the implementation of the remedy—in particularly, with respect to the second issue. If this assumption proves correct, then Appeals Court may need to do more to finish the ruling than to quickly sign off on whatever clarification the Judge sends their way (they are likely to accept briefs by the parties with respect to the District Court ruling).
 
 
Notes:
 
(1) "Stay" (1953) written by Maurice Williams and the Zodiacs and performed in its more well-known versions by Jackson Browne (1977) and Bruce Springsteen (1979) ... Won't you staaaaay... justa little bit longeeer... pleeease, pleeease, pleeease... say-you-will, saaay you will...
 
 
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