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Date: February 15, 2005
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 Amendment".
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 bondholders.
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 claim.
The Argentine Legislation
The new Argentine Legislation appears to change the legal status quo significantly (the following is based on unofficial translations) in four ways:
@@start.t1@@ 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)@@end@@
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:
@@start.t2@@ 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."
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."
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)@@end@@
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 together.
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
@@start.t3@@ (A) returned the property,
(B) provided adequate and effective compensation ... as required by
(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
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.
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: email@example.com
@@start.t4@@ GCAB Contact:
Hans Humes Greylock Capital Associates, LLC, +1-212-808-1818
Nicola Stock Associazione per la Tutela Degli Investitori in Titoli
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.
Web site: http://www.gcab.org
ots Originaltext: GCAB
Im Internet recherchierbar: http://www.newsaktuell.ch
Hans Humes, Greylock Capital Associates, LLC, +1-212-808-1818; Nicola
Stock, Associazione per la Tutela Degli Investitori in Titoli
Argentini, +3906-676-7603, both for GCAB