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Repeated amendments barring payments to holdout bondholders demonstrate that President Kirschner has no difficulty in obtaining almost instantaneous approval from the legislative branch for whatever new laws are needed. (Photo: Argentina's Presidency)
Wednesday, July 23, 2014
Perspectives

Argentina: RUFO Clause Should Not Impede Settlement

Argentina has everything to lose and little, if anything, to gain by avoiding a settlement with holdouts.

BY RICHARD SAMP 

As the clock continues ticking on Argentina's potential default on its Exchange Bonds, press reports indicate that Argentina may be considering a negotiated settlement with holdout bondholders.  Such a settlement would allow Argentina to make scheduled interest payments to Exchange Bondholders without violating the terms of the pari passu injunction issued by the U.S. District Court in New York.  Recent press accounts suggest that a bond provision known as the RUFO Clause poses an obstacle to a negotiated settlement.  Those press accounts are mistaken and are based on a misunderstanding of the RUFO Clause.

The RUFO Clause was included in the contractual terms entered into between Argentina and bondholders who, in 2005, agreed to accept a 70 percent haircut by exchanging their defaulted bonds for new Exchange Bonds issued by Argentina.  The RUFO (Rights Upon Future Offers) Clause sought to induce bondholders to agree to the exchange by promising that if Argentina later voluntarily offered better terms to other bondholders at any time before the end of 2014, it would offer the same enhanced terms to Exchange Bondholders.  The Clause further provided that if Argentina failed to extend those same terms to Exchange Bondholders, the latter could declare a default and demand immediate payment of the pre-Exchange balance due.

Under any plausible reading of the RUFO Clause, a settlement with holdout bondholders would not permit Exchange Bondholders to demand full payment.  The Clause applies only to payments made voluntarily to holdout bondholders.  Any settlement reached with the holdouts between now and the July 30 default deadline cannot be deemed voluntary.  To the contrary, Argentina would be acting pursuant to a federal court injunction which requires it to pay the holdouts if it wishes to continue to make interest payments on the Exchange Bonds.

Moreover, even if the RUFO Clause were applicable (which it is not), the worst-case scenario for Argentina that could arise from an agreement to settle with holdout bondholders is not substantially different from the situation that will arise if Argentina fails to reach an agreement and thereby finds itself barred from making scheduled interest payments to Exchange Bondholders.  Under both scenarios, Argentina would once again find itself in default on all its foreign debt.  Accordingly, Argentina has everything to lose and little, if anything, to gain by avoiding a settlement with holdouts.

Finally, there is no merit to recent press suggestions that government officials might face criminal sanctions were they to settle with holdout bondholders.  The theory put forward by some commentators:  government officials might be prosecuted under Argentine law for malpractice if, as the result of a settlement with Exchange Bondholders, the RUFO Clause were to be activated.  For the reasons explained above, a settlement would not activate the RUFO Clause.  Moreover, a ready answer to any such concerns would be to amend Argentine law to explicitly sanction a settlement.  Recent history involving bondholder disputes (particularly, the repeated amendments to the Lock Law barring payments to holdout bondholders) demonstrate that President Kirschner has no difficulty in obtaining almost instantaneous approval from the legislative branch for whatever new laws are needed to support the executive branch's latest litigation strategy.

Richard A. Samp is Chief Counsel of the Washington Legal Foundation, which is the nation's premier public interest law and policy center.  WLF's mission is to preserve and defend America's free enterprise system by litigating, educating, and advocating for free market principles, a limited and accountable government, and individual and business liberties.

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