GCAB Releases Legal Memorandum Summarizing Recent Argentine Legislation and Bondholder Remedies

Feb 16, 2005, 00:00 ET from GCAB

    NEW YORK, Feb. 16 /PRNewswire/ --
      New York
      Date: February 15, 2005
      To: GCAB
      From: Owen C. Pell
      Re: Recent Argentine Legislation and Bondholder Remedies
     On February 11, Argentina promulgated legislation that put into written
 law measures that are designed to negatively effect or destroy the value of
 Bonds held by GCAB members and their customers/depositors. As discussed below,
 the Argentine Legislation may well create opportunities for GCAB and its
 members to pursue a different and more efficient litigation path against
 Argentina. This path would be based on the possibility of binding arbitration
 proceedings against Argentina before the International Centre for the
 Settlement of Investment Disputes ("ICSID").
     This memo is preliminary in nature and is meant to provide an introduction
 to the issues raised by the Legislation. Set forth below are a brief review of
 (i) the current litigation situation; (ii) the Argentine Legislation; (iii)
 the basis for relief under the ICSID regime; (iv) the potential advantages of
 an ICSID award over a U.S. court judgment; and (v) the so-called "Helms
     The Current Litigation Situation
     As we have discussed, at present, GCAB's ability to oppose or frustrate
 the Argentine Exchange Offer are limited. Argentina defaulted on its debt in
 2001. To date, some individual creditors have received judgments in U.S.
 federal court, but have had little success in locating, and no success in
 attaching or executing on, any Argentine assets. In the 12 class actions that
 have been filed, Judge Griesa has certified only two classes representing
 about US$ 3.5 billion of Argentina Bonds (about 4.3% of the outstanding
 principal in default).
     Although Judge Griesa allowed GCAB to appear in the Urban case as an
 amicus curaie, and agreed with our view that Rule 23 of the Federal Rules of
 Civil Procedure did apply to the Exchange Offer, he made clear that he was not
 prepared to enjoin the Exchange Offer under current circumstances. Judge
 Griesa, however, did order that an Appendix that GCAB helped prepare and that
 was critical of the Exchange Offer could be transmitted to bondholders with
 the class notice. This (and GCAB's successful amicus appearance) was a fairly
 unprecedented result under U.S. law, and was a first in any debt restructuring
 litigation. Nonetheless, these victories did not block the Exchange Offer,
 they simply shifted the focus of the battle to the public markets where GCAB
 has been waging an effective campaign to convince bondholders not to tender
 into the Exchange Offer.
     Over the last few months, GCAB members have sought advice on their options
 with regard to U.S. litigation and their ability to prevent or impede the
 movement of funds by Argentina under the Exchange Offer or otherwise. As you
 know, U.S. litigation options are limited. While it would be better to have
 more certified classes, that probably will not happen before the current
 termination date of the Exchange Offer, nor is there any assurance that Judge
 Griesa would, in any event, ever enjoin another version of the Exchange Offer.
 In addition, the value (real or in terroram) of an eventual U.S. judgment,
 even a significant judgment on behalf of large classes, appears limited
 because Argentina has made itself seemingly judgment-proof. Moreover, there is
 no assurance of intercepting Argentina's payments under the Exchange Offer or
 under future debt offerings, including because Argentina will employ trust
 structures and other measures to place funds beyond the reach of current
     Finally, to date, Argentina has avoided official conduct that might be
 labeled an "expropriation" or "repudiation" of the Bonds. That is, the
 Exchange Offer does not preclude amendment, extension, or future offers, and
 the Most Favored Creditor clause appears to allow for side or other future
 settlements with Bondholders above the levels offered in the Exchange Offer.
 The only contrary messages have been "tough talk": oral comments by Argentine
 government officials that the Exchange Offer would be the last offer and no
 other payments would be made. As such, remedies premised on expropriation or
 repudiation were not yet a focus because Argentina had been careful in its
 Exchange Offer documents to avoid creating facts to support that kind of
      The Argentine Legislation
     The new Argentine Legislation appears to change the legal status quo
 significantly (the following is based on unofficial translations) in four
      1. The Argentine Executive branch may not re-open the Exchange Offer
         authorized by the Legislature. (Article 2)
      2. The National Government may not make any kind of judicial, out of
         court or other private settlement involving the Bonds. (Article 3)
      3. The Executive branch is to take all steps necessary to delist the
         Bonds from any Argentine or foreign exchange. (Article 4)
      4. It appears that any Bonds deposited in Argentine courts (we have not
         pinned down what categories of Bonds this effects) and that have not
         already opted into the Exchange Offer will be replaced as of the
         Exchange Date under the authorizing legislation with the 2038
         Argentine Peso Bonds available under the Exchange Offer. (Article 6)
     With regard to Bonds held outside of Argentina and payable outside of
 Argentina under foreign law (e.g., U.S. Dollar bonds payable in New York under
 New York law), U.S. law is clear that the Argentine Legislation should not be
 recognized or applied. Thus, Argentina should not be able to act against Bonds
 located outside of and payable outside of Argentina.
     The Legislation, however, appears to establish significant evidence of
 repudiation or expropriation. The Legislation specifically prohibits
 additional or extended versions of the Exchange Offer and also precludes other
 settlements or private transactions involving the Bonds. Thus, the Exchange
 Offer is final and appears to leave dissenting Bondholders with no additional
 consensual source of payment by Argentina (indeed, even full repayment might
 be prohibited to the extent it is viewed as a settlement outside the current
 Exchange Offer). Delisting is recognized as something that harms the value of
 any security by eroding liquidity and transferability. Finally, as to Bonds
 within its reach, the Argentine government appears to be expropriating old
 debt in favor of new, less valuable, debt. It also does not appear that there
 is an effective remedy in Argentine courts with respect to the effects of the
 Legislation or any delisting, let alone for the existing payment defaults.
     The ICSID Convention Regime
     Argentina has signed 29 Bilateral Investment Treaties ("BITs"), including
 with Belgium, Canada, France, Germany, Italy, Luxembourg, the Netherlands,
 Spain, Switzerland, the United Kingdom and the United States. The U.S.-
 Argentina BIT appears to be indicative:
      1. The Bonds should be viewed as "investments" which includes debt and
         contract rights. (Article I)
      2. Investments must receive the full protection of international law.
         They may not be "impaired" by "arbitrary or discriminatory measures."
         (Article II)
      3. Investments may not be "expropriated" or "nationalized" or subject to
         measures "tantamount to expropriation or nationalization." If such
         measures occur, "prompt adequate and effective" compensation must be
         paid. This is defined as "[(i)] equivalent to the fair market value of
         the expropriated investment immediately before the expropriatory
         action was taken or became known ... [and shall (ii)] include interest
         at a commercially reasonable rate from the date of expropriation,
         [(iii) be fully realizable; and [(iv)] be freely transferable at the
         prevailing market rate of exchange on the date of expropriation."
         (Article IV)
      4. Before initiating arbitration, the parties are to attempt to consult
         and negotiate for six months. (Article VII) Argentina's BITs with some
         European nations appear to have somewhat different consultation
         clauses, which will need to be reviewed.
      5. Argentina consents to disputes being submitted to arbitration,
         including under the Convention on the Settlement of Investment
         Disputes between States and Nationals of Other States, done at
         Washington, D.C., March 18, 1965 (the "ICSID Convention"). (Article
         VII) ICSID is located in Washington, D.C., and the ICSID Convention
         has been signed by 156 nations. Under the ICSID Convention, the
         Bondholders would name an arbitrator, who would then participate in
         the selection of a chairman for a three-person tribunal. In our
         experience, ICSID has been a sympathetic and fair forum for creditors.
      6. Any arbitral award is final, binding, and shall be paid without delay.
         Argentina must enforce awards in its territory. Also, ICSID awards
         become enforceable under the ICSID Convention and the United Nations
         Convention for the Recognition and Enforcement of Foreign Arbitral
         Awards (the "New York Convention" signed by over 160 nations), such
         that they have the force of judgments issued by the highest court of
         any signatory state. (Article VII)
     The Legislation would appear to make official what Argentina has been
 saying for several years with respect to its repudiation of payment
 obligations on the Bonds, thereby creating an expropriation or impairment that
 cannot be remedied under Argentine law, nor does Argentina appear to be
 offering just compensation to remedy the impairment. As such, the Legislation
 would appear to create a claim under the BITs. Significantly, it may be
 possible to consolidate Bondholder claims before an ICSID tribunal, such that
 GCAB Bondholders from different nations may pursue their BIT-related claims
     The Advantages Of An ICSID Award
     In our experience, nations pay their ICSID awards. Moreover, if they
 don't, award holders have advantages over the holders of U.S. judgments. U.S.
 judgments are not automatically respected under non-U.S. laws, and are not
 accorded the weight given to ICSID awards under the ICSID and New York
 Conventions, which are treated as judgments of the highest court of any
 signatory. For example, under current Argentine law, it is unclear how
 enforceable any U.S. judgment on the Bonds would be in Argentina. Under ICSID
 and the New York Convention, Argentina is obligated to honor ICSID arbitral
 awards in Argentina.
     In addition, an ICSID award may be used to attach broader categories of
 property under the U.S. Foreign Sovereign Immunities Act than a conventional
 U.S. judgment. Unlike regular judgments, arbitral awards may be enforced
 against sovereign property used for commercial activity without a showing that
 the property was used for the commercial activity at issue in the claim.
 Accordingly, any and all Argentine property used for commercial activity
 (including property relating to future debt issuances) could be subject to
 attachment and execution.
     Thus, using the ICSID procedure may hold real advantages over U.S.
 proceedings, including U.S. class action proceedings, especially given the
 difficulties U.S. judgment holders have had to date in enforcing their
 judgments outside of Argentina.
     The Helms Amendment
     Given the applicability of the U.S.-Argentina BIT, it also should be noted
 that GCAB members in the United States may be in a position to effectively
 compel Argentina to participate in an ICSID proceeding relating to the Bonds.
 The so-called "Helms Amendment" "prohibits U.S. foreign aid, including U.S.
 approval of financing by international financial institutions, to a country
 that has expropriated the property [or renounced a contract] of a U.S. citizen
 or corporation ... where the country in question has not
      (A) returned the property,
      (B) provided adequate and effective compensation ... as required by
          international law,
      (C) offered a domestic procedure providing prompt, adequate and effective
          compensation in accordance with international law, or
      (D) submitted the dispute to arbitration under the rules of the [ICSID
          Convention] or other mutually agreeable binding international
          arbitration procedure."
     In the 1990s, following the alleged expropriation of property owned by an
 American investor, Costa Rica refused to submit to ICSID arbitration. The
 American investor invoked the Helms Amendment and delayed a US$ 175 million
 loan from the Inter-American Development Bank to Costa Rica. Costa Rica
 consented to the ICSID proceeding, and the American investor ultimately
 recovered US$ 16 million.
     Based on the above, it appears that the Argentine Legislation actually may
 present GCAB and its members with additional options for putting pressure on
 Argentina and for pursuing their rights on their Bonds.
     As noted above, this memorandum is preliminary and is intended to be a
 brief introduction to the issues presented. We would welcome the opportunity
 to discuss the issues presented further, and/or to provide additional
 information regarding ICSID.
     About GCAB
     GCAB was formally established in January 2004 by representatives of all
 the major foreign bondholder constituencies of defaulted Argentine debt, and
 consists of a broad-based group of holders. The Steering Committee represents
 holders from Germany, Italy, Japan, Switzerland, the USA and other countries.
 Its retail and institutional members hold approximately US$40 billion in
 defaulted debt of Argentina, accounting for 45% of the principal amount of
 US$82 billion in outstanding Argentine debt and 73% of all outstanding
 Argentine debt held outside Argentina. In order to download its recent
 Investor Roadshow Presentation, the Urban Class Action Appendix to the class
 notice distributed in connection with the Urban Class Action filed in the
 United States, a GCAB general membership form, position papers or obtain
 additional information, please visit the GCAB website at http://www.gcab.org.
     For those interested in more information about joining GCAB's ICSID
 efforts please contact: icsid@gcab.org
     GCAB Contact:
     Hans Humes     Greylock Capital Associates, LLC, (212) 808-1818
     Nicola Stock   Associazione per la Tutela Degli Investitori in Titoli
                    Argentini (3906) 676-7603
     Investors in Argentine securities must make their own evaluation, analysis
 and decision with respect to participation in any exchange offer,
 restructuring, debt swap or other transaction, based on such information as
 they deem appropriate after consultation with their own advisors and without
 reliance upon this communication or any materials contained herein or
 furnished herewith or upon GCAB or any of its members, affiliates or advisers.
 Any such evaluation, analysis and decision should be based on, among other
 matters, the investor's own views as to the financial, economic, legal,
 regulatory, tax and other risks and consequences associated with Argentina's
 exchange offer, including but not limited to the consequences of declining to
 participate in any exchange offer proposed by Argentina, the structure, terms
 and conditions of any proposed new securities, the Argentine political
 situation and economy, convertibility and exchange rate risks, and risks posed
 by developments in other emerging market countries.
     GCAB and each of its members, affiliates and advisors disclaims any and
 all liability relating to any exchange offer or other transaction proposed by
 Argentina or any creditor's decision regarding its participation or non-
 participation in any such exchange offer or any transaction or any litigation
 pursued by or on behalf of such creditor either individually or in concert
 with others, whether or not such decision was made in whole or in part based
 on information furnished by or obtained through GCAB.
     The information contained herein or furnished herewith are for discussion
 purposes only and do not constitute an offer or solicitation of an offer to
 purchase or sell any security. These materials are not intended to form the
 basis, in whole or in part, for any investment decision or to provide a rating
 or recommendation of any kind with respect to any investment opportunity.
 Factual information contained herein or furnished herewith has been obtained
 from sources believed to be reliable, but its accuracy and completeness cannot
 be guaranteed. Any financial and economic projections and pricing estimates
 contained herein or furnished herewith are illustrative only and are based on
 assumptions that may prove inaccurate or incomplete. Actual prices,
 performance and results may differ substantially. GCAB and each of its
 members, affiliates and advisors disclaims any and all liability relating to
 these materials including, without limitation, any error in or omission from
 the information contained herein or furnished herewith and any duty to update
 the same in whole or in part. These materials speak only as of the date hereof
 and are subject to change without notice. The views expressed herein or
 furnished herewith do not necessarily represent the position of any GCAB
 member, affiliate or adviser. GCAB and its members, affiliates and advisers
 may have positions and deal as principal in transactions in securities
 discussed herein (or options with respect thereto), including positions and
 transactions inconsistent with the matters discussed herein.