Vol 3 (2006) - Issue 1

Article preview

Clashing Clauses in Debt Instruments: Some Notes in View of the Restructuring of the 'Aconcagua' Bond and its Challenge in US Courts

Introduction

The aim of this article is to address the recent Greylock case against the Province of Mendoza –a political sub-division of the Republic of Argentina – that, affected by the economic, political and financial national crisis suffered in 2001-2002, defaulted on the ‘Aconcagua’ bond. The recent external debt episode in Argentina resulted in an acute financial and economic crisis, championing the biggest default in history. Investors in developing countries, particularly in Latin American countries, are not exempt from turmoil (e.g. the Mexican Peso Crisis in 1995; Ecuador’s financial crisis and default on its external debt in 1999; the devaluation of the Brazilian real in 1999; Argentina’s external debt default in 2001 and its banking crisis in 2002; and Uruguay’s banking crisis and debt re-profiling in 2003). Likewise, other financial crises such as the Asian crisis of 1997 or the Russian crisis of 1998 directly impacted on the region either by deepening recessive periods or by originating these crises.
As the result of the crisis the Province of Mendoza was faced with many difficulties in servicing the ‘Aconcagua’ bond due in 2007 with a bullet payment of USD 250 million. The bond that was originally maturing in 2007 represented more than 40% of Mendoza’s annual USD 580 million budget.

The Greylock case is of particular interest because it addresses many interesting topics in debt restructuring, i.e.(1) exchange offers as a means of debt restructuring; (2)the use of exit consent; and (3) the contractual interpretation of clashing clauses in debt instruments. The focus of the analysis will center on the transactional issues rather than on the procedural aspects.