Hayk Kupelyants is a PhD candidate at Sidney Sussex College, University of Cambridge.
Argentina’s 2001 economic crisis led to one of the most extensive sovereign debt restructurings in history. In hindsight, it was also one of the harshest, in terms of Argentina’s negotiating stance and the losses incurred by bondholders. Ninety-three percent of holders of Argentine sovereign bonds eventually accepted the terms of two restructurings in 2005 and 2010, but seven percent of bondholders, holding an approximate US $4 billion of Argentine sovereign bonds “held out,” or declined to accept restructured bonds. The plaintiffs in the litigation discussed in this post hold US $1.7 billion, which they seek to recover through litigation in US courts.
NML Capital and other hedge funds purchased the Argentine bonds on the ‘secondary market’, i.e. on the market of previously issued financial instruments, from the original owners of bonds. The business model of hedge funds specialising in distressed debt is to purchase sovereign debt or judgments against a sovereign on the secondary market at a deeply reduced price to their par and, by consistently holding out from the renegotiation process and aggressively litigating, recover the full value of the bonds. The Argentine bonds purchased by the hedge funds contained choice of forum clauses in favour of New York courts, choice of law clauses in favour of New York law and broad waivers of sovereign immunity. The combination of these clauses should havemade the effort of recovering the debt much less painful. However, the hedge funds’ continuous efforts to enforce US judgments in their favour around the world have so far been modestly successful at best.
In the view of many, the balance of powers may change as a result of the recent US litigation. The US court litigation discussed in this blog post has been called ‘the trial of the century’ or the litigation that will change the landscape of sovereign debt restructurings. It has been remarkable, as the hedge funds have come close to being repaid under the bonds purchased on the secondary market. In an unprecendented turn of the litigation, the holdout creditors have obtained third-party injunctions from US courts that have driven a sovereign state to default. Read the rest of this entry…