Recent events in Europe have illustrated how government defaults can jeopardize domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky (2012)). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizable share of their assets in their governments’ bonds: roughly 5% in Portugal and Spain, 7% in Italy and 16% in Greece (2010 EU Stress Test). As sovereign spreads rose, moreover, these banks greatly increased their exposure to the bonds of their financially distressed governments (2011 EU Stress Test), leading to even greater fragility. As The Economist put it, “Europe’s troubled banks and broke governments are in a dangerous embrace.” These events are not unique to Europe: a similar relationship between sovereign defaults and the banking system has been at play also in earlier sovereign crises (IMF (2002)).
Posts Tagged ‘Bondholders’
The Supreme Court issued its decision yesterday [June 16, 2014] in Republic of Argentina v. NML Capital, No. 12-842, holding that the Foreign Sovereign Immunities Act (FSIA) does not limit the scope of discovery available to a judgment creditor in post-judgment execution proceedings against a foreign sovereign.
As part of NML’s efforts to collect on various litigation judgments entered against Argentina following its default on bond obligations, NML sought discovery of Argentina’s assets around the world in an attempt to locate Argentine property that might be subject to attachment and execution. Those efforts included subpoenas served on Bank of America and Banco de la Nacion Argentina, both of which had offices in New York. The subpoenas generally sought information about Argentina’s accounts, balances, transaction histories and funds transfers. Argentina and the banks sought to quash the subpoenas, contending that they violated the FSIA by seeking discovery of Argentina’s extraterritorial assets that were beyond the reach of U.S. courts. The district court denied the motion to quash, and the Second Circuit affirmed. Only Argentina sought review in the Supreme Court.
On February 18, both Argentina and the Exchange Bondholders Group filed petitions for writs of certiorari with the Supreme Court, seeking review of the Second Circuit’s rulings in the pari passu litigation. We discuss below the certiorari procedure, followed by comments on substantive arguments raised by Argentina and the Exchange Bondholders.
Our many prior comments on Argentina’s pari passu litigation, as well as all of the material pleadings and decisions (including the two February 18 certiorari petitions), can be found on our Argentine Sovereign Debt webpage, at http://www.shearman.com/argentine-sovereign-debt.
Argentina is in hot pursuit of multiple audiences before the Supreme Court: two petitions for writs of certiorari filed by Argentina are pending in the NML v. Argentina cases, and another is almost certainly on the way. In addition, a writ of certiorari has already been issued in another case against Argentina. With so much action involving Argentina in the high court, there is the potential for confusion between these multiple proceedings, which we clarify in this post.
NML Capital, Ltd. v. Argentina (Supreme Court Docket No. 12-1494): Review of the Second Circuit’s October 26, 2012 Decision (Pari Passu)
On June 24, 2013, Argentina filed a certiorari petition with respect to the Second Circuit’s October 26, 2012 decision, in which the Second Court affirmed Judge Griesa’s interpretation of the pari passu clause, his determination that the plaintiffs were entitled to a “Ratable Payment,” and his conclusion that the Injunction did not violate the Foreign Sovereign Immunities Act (“FSIA”). However, the Court remanded the case to Judge Griesa to address certain issues relating to the operation of its Injunction.
On May 13, 2013, the U.S. Bankruptcy Court for the District of Delaware confirmed a prepackaged Chapter 11 plan of reorganization in the case of Central European Distribution Corporation (CEDC)  that incorporated an unmodified reverse Dutch auction. A reverse Dutch auction is a type of auction employed when a single buyer accepts bids from numerous sellers, and lowest-priced seller bids are accepted as winning bids.
The CEDC plan is perhaps the first instance of a Dutch auction process being incorporated successfully into a Chapter 11 reorganization plan. This precedent provides guidance for the use of Dutch auctions that may offer creditors distribution alternatives and maximize the utility of limited cash (or other limited property) available for distribution under a plan.
UBS recently announced it would pay part of the bonuses of 6,500 highly compensated employees with bonds that would be forfeited if the bank does not meet its capital requirements. Taxpayers should applaud this initiative. Other financial institutions should be rewarded for emulating it.
As the global financial crisis of 2007-2009 reminds us, the impairment of large interconnected intermediaries can have devastating effects on economic activity. This threat can induce governments to bail out distressed financial institutions. The direct costs to taxpayers of these bailouts are apparent. Beyond the direct costs, the prospect of bailouts removes much of the downside risk that the owners and employees of financial institutions should bear, distorting their financing and investment decisions, as well as increasing the likelihood and expected magnitude of future bailouts. The UBS “bonus bonds,” which echo a recommendation we made in The Squam Lake Report (French et al, 2010), mitigate these distortions.
Exit consents are often used as a restructuring tool by issuers of bonds. Issuers invite bondholders to exchange their existing bonds for new bonds (usually with a lower principal amount). In order to participate in the exchange, bondholders must agree to vote in favour of a resolution that amends the terms of the existing bonds so as to negatively affect (or, in Assénagon,  substantially destroy) their value. This is referred to as ‘covenant-stripping’. If the issuer does not achieve the majority needed to pass the resolution, the covenant-strip and the exchange do not happen. But if the resolution is passed, each participating holder’s bonds are exchanged for the new bonds, and the terms of the old bonds are amended to remove most of the protective covenants. This incentivises bondholders to participate in the exchange: accepting the new bonds (even though they will usually have a lower face amount than the existing bonds) may be preferable to being ‘left behind’ in the old bonds, which will cease to have any meaningful covenant protection.
Facts of the case
Anglo Irish Bank Corporation Limited (the “Bank”) suffered severe financial difficulties as a result of the financial crisis, and was nationalised in January 2009. As part of its restructuring, the Bank proposed an exchange offer whereby:
The Second Circuit has ordered Argentina to submit a payment proposal, following oral argument in the NML v. Argentina appeal.
As we reported in a February 28 note, the three-judge panel of the Second Circuit expressed interest in whether an alternative Ratable Payment formula might be appropriate – one that would provide for equitable payments to the plaintiffs over time but would not amount to a 100% one time payment. At the oral argument, payment proposals made by counsel for both Argentina and the Exchange Bondholders were vague. Following up on those proposals, the panel ordered Argentina’s counsel to state “in writing” “the precise terms” of any “alternative payment formula and schedule to which it is prepared to commit.” The March 1, 2013 order provides in full as follows:
An update on the final round of appellate filings in the NML v. Argentina appeal.
On January 25, briefs were filed with the Second Circuit on behalf of two groups of plaintiff-appellees in the appeal from District Court Judge Griesa’s November 21 injunction, NML and Aurelius. And on February 1, four sets of reply briefs were filed, on behalf of appellants Argentina, Bank of New York Mellon (BNY Mellon), the Exchange Bondholders Group, and Fintech Advisory. Under the schedule set by the Second Circuit, briefing is now concluded, and the next major event will be oral argument before the Second Circuit on February 27.
Copies of all of these papers can be found on our Argentine Sovereign Debt webpage, at http://www.shearman.com/argentine-sovereign-debt/. Our summary of the prior briefing on this appeal can also be found there.
We summarize below the major points made in each of these six briefs, followed by our compilation of the major issues cutting across the virtual mountain of briefing confronting the three-judge panel that will decide this case.
The Delaware Supreme Court has affirmed the Court of Chancery’s decision not to aggregate a series of dispositions in determining whether they constitute a transfer of “substantially all” of a company’s assets under a bond indenture. See Bank of New York Mellon Trust Co. v. Liberty Media Corp., No. 284, 2011 (Del. Sept. 21, 2011) (en banc).
The case arose out of a June 2011 proposal by Liberty Media Corporation to split off its Capital and Starz businesses. Certain of Liberty’s bondholders objected to the split-off as a transfer of “substantially all” of the company’s assets in violation of Liberty’s bond indentures. Although the Capital and Starz businesses alone would not amount to “substantially all” of Liberty’s assets, the bondholders argued that the proposed split-off should be considered together with three prior dispositions undertaken by Liberty since March 2004.