For the benefit of our clients and friends investing in European distressed opportunities, our European Network is sharing some current developments.
Global—On 16 June 2014, despite the Republic of Argentina's warning that it may once again be forced to default on its sovereign debt, the US Supreme Court denied Argentina's petition seeking review of lower court rulings that: (i) construed pari passu, or equal footing, clauses of a bond indenture to prohibit Argentina from making payments to bondholders who participated in 2005 and 2010 debt restructurings before it pays US$1.4 billion to holdout bondholders (see NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012)); and (ii) upheld a lower court's order directing Argentina to pay holdout bondholders US$1.4 billion (seeNML Capital, Ltd. v. Republic of Argentina, 727 F.3d 230 (2d Cir. 2013)). The Court also denied certiorari in a related appeal by certain non-party bondholders (Exchange Bondholder Group v. NML Capital Ltd., No. 13-991).
Argentina's economy minister announced on 17 June 2014 that, in an effort to continue meeting Argentina's obligations to creditors who participated in the country's previous debt restructurings, the government is taking steps to execute a debt swap governed by Argentine law. In response, US District Court Judge Thomas Griesa, who originally ordered Argentina to pay the US$1.4 billion to holdout bondholders on 21 November 2012, directed Argentina at a hearing held on 18 June 2014 to comply with his previous orders before it can make a US$900 million payment on 30 June 2014 to its exchange bondholders. Representatives from the Argentine government later announced that they would meet with the holdout bondholders, including NML Capital and Aurelius Capital, in an effort to negotiate a settlement.
On 20 June 2014, Argentine President Cristina Kirchner stated in a nationally televised speech that her government wants to reach a settlement with the holdout bondholders, but only if US courts create the right conditions for negotiations. On 23 June 2014, Argentina asked District Judge Griesa to suspend rulings directing the country to pay holdout bondholders so that the parties can engage in settlement talks. According to Argentina, paying US$1.4 billion to holdout bondholders when it makes the next regularly scheduled payment on its restructured debt would wipe out half its cash reserves. Later that day, Judge Griesa appointed a special master to preside over the negotiations. On 24 June 2014, holdout bondholders objected to the Argentine government's request for additional time to negotiate a deal, saying a delay would only give the country more time to launch an evasion plan.
On 26 June 2014, District Judge Griesa issued an order rejecting Argentina's request to suspend his ruling directing the country to pay holdout bondholders at the same time it pays exchange bondholders. "Such a request is not appropriate," Judge Griesa wrote, explaining that "[t]he injunctive relief ordered by the court (dealing with the pari passu issue) does not even come into play unless the Republic makes payments to the exchange bondholders." He further stated that "[t]he court has no control over whether or not the Republic makes such payments." Earlier that day, Argentina announced that it deposited more than US$839 million into trustees' accounts for the purpose of making interest payments on its exchange bonds.
In a court hearing on 27 June 2014, Judge Griesa ruled that Argentina's attempt to pay US$539 million to exchange bondholders without paying holdout bondholders is illegal and ordered The Bank of New York Mellon Corp. to return the money to the Argentine government. The judge characterized Argentina's bid to pay exchange bondholders as "disruptive" and warned banks against facilitating any such payment.
In a separate ruling handed down on 16 June 2014, the US Supreme Court, by a margin of seven to one (with one Justice abstaining), affirmed a decision of the US Court of Appeals for the Second Circuit (EM Ltd. v. Republic of Argentina, 695 F.3d 201 (2d Cir. 2012)), directing two banks, in connection with Argentina's long-running dispute with holdout bondholders, to disclose comprehensive information concerning assets Argentina owns outside the US. Writing for the majority, Justice Scalia concluded that no provision of the Foreign Sovereign Immunities Act of 1976 immunizes a foreign sovereign judgment-debtor from post-judgment discovery of information concerning its extraterritorial assets. In a dissenting opinion, Justice Ginsburg objected to the "sweeping examination of Argentina's worldwide assets the Court exorbitantly approves today," writing that she "would limit NML's discovery to property used [in the US] or abroad 'in connection with … commercial activities.'"
Global—On 29 May 2014, the Republic of Argentina reached an agreement to repay US$9.7 billion in debt over a period of five years to the "Paris Club," an unofficial consortium of finance officials from 19 nations that provides financial services such as debt restructuring, debt relief and debt cancellation to indebted countries and their creditors. Under the agreement, Argentina will make an initial payment of US$650 million in July 2014, a US$500 million payment in May 2015 and three annual payments each year thereafter to retire the debt. The interest rate is set at three percent. The agreement provides that if the Paris Club's 19 member countries make significant investments in Argentina, the required amount of Argentina's payment installments may increase. However, if those countries make insufficient investments in Argentina during the next five years, the maturity on the Paris Club debt could be extended by two years, with a one percent increase in the interest rate.
Europe—Employers with European operations looking to restructure within the European member states need careful contingency planning. Many European governments have responded to the recent economic events by trying to make the labor market more flexible.Italy, for example, intends to implement reforms dealing with more flexible models of employment and state assistance for employees of Italian companies in distress and a new unemployment indemnity. The Netherlands is about to embark upon a two-year period of legislative reform which will substantially overhaul Dutch labor law. The UK has responded to the need for companies to restructure more readily by implementing measures such as reducing the minimum consultation period. For large-scale redundancies (involving more than 99 employees within 90 days), such period was formerly 90 days; this has now been reduced to 45 days. For redundancies of between 20 and 99 employees, the period is 30 days. For 19 or fewer employees, there is no minimum period. Many employers sought to avoid collective consultation by treating split sites as separate businesses. However, a significant question has been referred to the European Court of Justice on what constitutes "a single establishment" for the purpose of collective consultation. France, with its powerful works' councils, now requires any social plans—in the event of a mass layoff—to be approved by the French Labor Administration. Early indications are that this new requirement will substantially reduce litigation triggered by collective dismissals. A more detailed discussion of these developments can be found here.
The EU—On 9 June 2014, the European Union's Justice Council approved a proposal to make significant changes to regulations governing cross-border bankruptcy or insolvency cases, including amendments designed to shift the focus of courts away from liquidation and toward restructuring of financially troubled enterprises in an effort to save jobs and increase creditor recoveries.The amendments should provide clarity for insolvency courts by allowing them more readily to cooperate and coordinate cases involving stakeholders in several of the EU's 28 Member States. The new rules are also intended to benefit creditors by requiring government agencies to make information regarding proceedings available online. Approximately 50,000 companies file for bankruptcy in the EU each year, roughly one-quarter of which contain cross-border elements. With the approval of the Justice Council, the European Parliament, Council of Ministers and European Commission will begin negotiating a final version of the proposal. Authorities anticipate that the new regulations can begin to be implemented by the end of 2014. The existing EU cross-border bankruptcy rules went into effect in May 2002 with implementation of the Insolvency Regulation (Reg. 1346/2000). On 12 December 2012, the European Commission published the proposal to amend the Insolvency Regulation with the goals of rescuing viable businesses rather than winding them up and increasing legal certainty for creditors.