Vol 10 (2013) - Issue 3

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NML Capital Ltd v The Republic of Argentina

In NML Capital, Ltd. v The Republic of Argentina, the United States Court of Appeals for the Second Circuit affirmed two critically important holdings relating to the United States’ role in the sovereign debt market. First, the Second Circuit affirmed the district court’s interpretation of a fiscal agency agreement that enforced a non-subordination provision prohibiting Argentina from paying subsequent restructured debt issuances ahead of the original notes, despite the enactment of laws in Argentina prohibiting payment of the original notes. Second, cognisant that its ruling may be a pyrrhic victory since enforcement of its judgment in Argentina would be unlikely, the Second Circuit affirmed specific performance but remanded that part of the decision back to the district court to determine how to require bank intermediaries to comply with the court’s directives.

I. Background
The litigations underlying the NML decision stemmed from Argentina’s 2001 default on certain bonds, Argentina’s subsequent actions in an attempt to restructure its foreign debt, and its alleged failure to give effect to a pari passu clause contained in its original indebtedness.
In 1994 Argentina issued a number of debt securities ('FAA Bonds') under a Fiscal Agency Agreement ('FAA'), which contained a so-called pari passu clause. In 2001 Argentina defaulted on the FAA Bonds and the President of Argentina declared a 'temporary moratorium' on principal and interest payments on the nation’s external indebtedness, including the FAA Bonds. Since its default in 2001, Argentina has not made any payments on principal or interest under the FAA Bonds to bondholders.
Argentina attempted to restructure its debt in 2005 and 2010. In 2005, Argentina offered FAA bondholders the ability to exchange their FAA Bonds for new unsecured and unsubordinated bonds at a rate of 25 to 29 cents on the dollar (the ‘2005 Bonds’). Argentina subsequently took several actions in an attempt to pressure FAA bondholders to participate in the 2005 exchange. First, the prospectus for the 2005 Bonds disclosed that FAA Bonds would remain in default 'indefinitely' and that the government had 'no intention of resuming payment on any of the bonds eligible to participate in [the] exchange offer.' Second, Argentina’s legislature passed Law 26,017, known as the 'Lock Law.' The Lock Law (i) prohibited the government from reopening any additional exchanges for FAA Bonds after the 2005 exchange was complete; (ii) prohibited the government from 'conducting any type of in-court, out-of-court or private settlement' in connection with the FAA Bonds; and (iii) required the government to remove the FAA Bonds from listing on all domestic and foreign markets and exchanges. Courts in Argentina have relied on the Lock Law to refuse recognition of foreign judgments related to the FAA Bonds.
Approximately 76% of the FAA bondholders participated in the 2005 exchange.
In 2010, Argentina conducted another exchange of FAA Bonds. In order to conduct this second exchange, Argentina temporarily suspended the Lock Law. Argentina then offered an exchange of FAA Bonds for new unsecured and unsubordinated bonds (the '2010 Bonds' and, together with the 2005 Bonds, the 'Exchange Bonds') on substantially similar payment terms as the 2005 Bonds.
In another attempt to pressure FAA bondholders to participate in the 2010 exchange, the prospectus contained a similar disclosure on Argentina’s intentions to keep the FAA Bonds in default and further disclosed that Argentina would oppose any litigation attempting to collect under the FAA Bonds.