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Latin Lawyer Insight - Debt Restructuring in Argentina

Updated: Mar 8

Key Questions Around Debt Restructuring in Argentina


20 OCTOBER 2023

Tomás M Araya and Martín Torres Girotti Bomcil


This article was first published on Latin Lawyer in October 2023; for further in-depth analysis, please visit the Latin Lawyer Guide to Restructuring.



Introduction

During Argentina’s economic crisis of 2001–2002,[2] the government passed several emergency laws, one of which (Law 25,589) incorporated relevant changes to the – up to that time – rarely used acuerdo preventivo extrajudicial (out-of-court restructuring agreement (APE)), set forth in Articles 69 to 76 of the Argentine Bankruptcy Law No. 24,522 (the ABL).

The amendments radically modified the structure of the APE by turning it from a purely consensual restructuring instrument into a hybrid instrument, which allowed it to keep its contractual and flexible nature but also to include – with court approval[3] – the best of the non-consensual restructuring world, that is the extension of its terms to non-consenting creditors without needing to enter into a full concurso preventivo proceeding.

More than 20 years have passed since the enactment of Law 25,589 and the APE has proved to be a very important instrument for large companies in financial distress, particularly with debt securities issued under the Argentine Negotiable Obligations Law No. 23,576 (LON), either in pesos or in US dollars.[4] Courts have accepted that the APE can be used to tackle financial obligations only, leaving unaffected obligations with suppliers, commercial counterparties and employees, among others.

Further, the APE has worked very well in the case of large debtors with excessive financial debt not only actively, but also passively, as an inducement to incentivise participation of creditors, thus facilitating successful debt restructurings. A template of the APE agreement would normally be included as an exhibit with the exchange or consent solicitation documentation, and consenting bondholders – by tendering their bonds – would agree to grant a proxy to sign the APE, if the company decides to use the APE and ask for court approval.[5]

In such cases when debtors manage to obtain a high level of support (i.e., 95 per cent or more) in their exchange offers or solicitation of consents, companies often decide not to proceed with the APE, leaving the rights of non-consenting bondholders unaffected.

In fact, the instrument has showed its faults and led to certain abuses of its application by certain small and medium enterprise (SMEs) debtors, mostly due to its limited regulation and lack of control and supervision. In the case of large companies in distress with debt securities issued in the market, the interaction between the securities laws of both the United States and Argentina has worked generally well to minimise the chances of abuse by the debtor.[6] It is expected that the ABL will be modified in the coming years,[7] following the latest developments in Latin America[8] and in Europe. While there are certain aspects of the APE regulation that undoubtedly needs to be improved – particularly in the case of SMEs – it is important that the changes do not alter its essence and its main characteristics, such as flexibility, limited court involvement, no administrator or trustee, and reduced costs.

Open questions

In this chapter, we analyse certain unclear situations that may appear when an Argentine company decides to restructure its financial debt mostly composed of bonds, which may have been issued under New York or Argentine law.

Can the APE be used as an efficient restructuring tool to restructure secured and non-secured bonds?

It is not unusual for Argentine corporate debtors to have outstanding series of both secured and unsecured bonds. The secured bonds may have been issued as secured from the outset or be the result of a previous liability management transaction launched by the debtor to exchange existing unsecured bonds for new secured bonds, with an extended maturity.

While Article 69 of the ABL generally refers to ‘creditors’, without distinguishing between secured or unsecured obligations, Article 73 of the ABL requires an absolute majority in number and two out of three of the unsecured obligations, not counting such creditors that are excluded by law pursuant to Article 45. Further the APE provisions – as different from the judicial reorganisation (concurso preventivo) provisions – do not expressly authorise the classification of creditors into classes

In the case of concurso preventivo proceedings, proposals to secured creditors are permitted under Article 44 of the ABL. To be approved, this proposal requires the same majorities as in the case of unsecured (majority in person and two out of three in amount) in the case of ‘general privilege’ creditors and unanimity in the case of ‘special privilege’ creditors, as pledges and mortgages.

Notwithstanding that the APE provisions seemed to refer exclusively to unsecured creditors and do not expressly authorise a classification of creditors, we do not see any objection if a debtor decides to offer different proposals to secured and unsecured creditors, in which case the required majorities must be obtained individually for each class. Further, one (or both) of the proposals may be conditioned upon the other (or both) of the majorities been obtained for each type of creditor.

However, dividing the creditors into classes may restrict the debtor’s ability to obtain the required majorities in each of the classes when there are holdouts that cannot be diluted by including them in a larger class. This situation may induce certain bondholders to hold out, or at least to adopt a wait-and-see approach.

One alternative to minimise holdouts and incentivise support is to convince the secured bondholders to release the collateral, which would normally be permitted under the terms of the bonds with a super-majority, and immediately thereafter vote – as unsecured – in favour of the APE. While it may sound rare that a creditor would accept to renounce its privilege, there may be sound business reasons for a secured bondholder to follow this path, particularly when the APE proposal – if accepted – would allow the supporting bondholders to receive secured bonds of similar characteristics.

This alternative would require – in the case of international bonds denominated in foreign currency[9] issued by a large Argentine debtor – a precise interaction of the existing indenture, the consent solicitation, the APE offer, the applicable bankruptcy provisions related to the APE, as well as the US and Argentine securities and capital markets provisions.

In a successful exchange offer filed as an APE, at what time would supporting bondholders receive the new bonds in exchange of the old bonds: once the majorities are obtained, upon filing or upon court confirmation?

The traditional approach would be to execute the restructuring plan (which would normally include the exchange offer) at the date when the court verifies that the requirements for confirmation have been satisfied and the decision to approve the APE becomes final and not subject to appeal. At this moment, the exchange would take place and all bondholders (consenting and non-consenting) would receive the new bonds in exchange of the old bonds.

In several cases, however, it has become common to structure the APE so that the consenting bondholders receive thew new bonds prior to the court approval, provided that the restructuring plan receives a certain percentage of consents, determined by the debtor (and higher to 66.66 per cent of the outstanding aggregate principal of bonds) (which would normally be referred as the ‘voluntary exchange date’).

Under this structure, non-consenting bondholders would have to wait to receive their new bonds until the APE receives court approval and such decision become final and not subject to appeal (which would normally be referred as the ‘court confirmation exchange date’). The court confirmation exchange date may be delayed due to challenges to the restructuring plan, and a final decision may take several months. These uncertainties may further induce doubtful bondholders to accept the debtor’s proposal prior to the offer’s expiration date.

Upon a restructuring plan instrumented as an APE, when would the stay become effective?

Unlike the US Bankruptcy Code, the ABL does not recognise the automatic stay as of the concurso preventivo or APE filing date.

In the case of concurso preventivo, the stay enters into effect retroactively as of the filing date when the court decides to ‘open’ the concurso. In the case of the APE, the stay takes place when the court orders the publication of notices announcing the APE filing, which in turn occurs only when all legal requirements for filing the APE are deemed satisfied by the competent court.

The stay only applies to foreclosure actions against the debtor or to interim measures involving disposal of assets but not to procedural steps prior to those stages. Therefore, legal actions filed by holdouts can continue, and if an attachment has been ordered prior to the date when the stay enters into effect, the company will have to comply with the court order and transfer the funds.

Notwithstanding the general rule, even before the publication of notices is ordered, the court would have the authority to stay a particular action or to lift an attachment obtained in a prepetition claim, by issuing a precautionary measure, which must meet the general admissibility requirements set forth by the applicable procedural law of the respective jurisdiction.

Typically, these requirements include (1) the likelihood of the invoked right, which must be evidenced by the debtor demonstrating the fulfilment of a substantial part of the requirements for the approval of the APE, particularly that a high percentage of acceptance of the proposal has already been obtained out of the total required for approval, (2) the risk of delay, consisting of the risk that the restructuring may be frustrated if the lawsuits sought to be suspended are allowed to proceed, (3) the impossibility of obtaining a stay through another precautionary measure, and (4) the provision of a counter-security by the debtor, which may be real or sworn at the discretion of the judge, to respond for the damages and losses that the measure may cause if it is found to have been requested without ground.

The stay would remain in effect until the court decision to approve or reject the APE becomes final and non-subject to appeal.

What legal remedies are available to non-consenting bondholders when a company launches a consent solicitation seeking to amend the bonds using exit consents and later files an APE?

At first, bondholders would have to analyse whether the initiation of an exchange offer with the promise to pursue an APE would entitle bondholders to invoke an event of default under the terms of the bonds, accelerate the bonds and claim full repayment. While this provision is not usual, we have seen it included in certain bonds issued by Argentine companies.

In this case (as in the case of a monetary default), bondholders would be entitled to file legal actions against the issuer claiming the full amount of the obligación negociable before the competent courts – which would not be stayed by the initiation of the exchange offer or restructuring plan. Once a final decision is obtained, bondholders would seek an attachment on the company’s banking accounts. Further, non-consenting bondholders may have recourse to the following options.

Non-consenting bondholders could challenge the bondholders’ decision that resolved the amendment of the bonds by an exit consent, claiming that it was adopted in violation of the applicable law, and requesting as a precautionary measure that the decision be suspended.

In the case of domestic bonds, the applicable law would be the LON, and the General Companies Law No. 19,550 (LGS). The general term to file this objection is three months from the date of the bondholders’ meeting, or – if no meeting was held – the date when the bondholders’ resolution was adopted.

We are not aware of any court decision that has decided to suspend a bondholders’ decision of this type. On the contrary, in a case decided by the Commercial Courts of the City of Buenos Aires, the Court of Appeals rejected the bondholders’ request to suspend the decision and ratify the legality of the exit consent technique used in that occasion, which had received affirmative votes of 99.5 per cent.[10] However, with the changes incorporated to the LON in 2018 – authorising the use of collective action clauses to impose changes on non-consenting bondholders for payment-related modifications – the outcome might in the future be different if essential terms (as principal, interest, date of payment, currency of payment, place of payment, jurisdiction, applicable law) are modified through this technique.[11]

In the case of international bonds issued under Rule 144A and Regulation S, the applicable governing law would normally be New York law for all substantial matters, except as provided in the terms of the bonds, which would normally mandate the application of Argentine law to certain issues. A typical provision would read as follows:

The New Notes Indenture and the New Notes shall be governed by, and will be construed in accordance with, the law of the State of New York; provided that the Negotiable Obligations Law governs the requirements for the New Notes to qualify as obligaciones negociables thereunder while such law, together with General Corporations Law No. 19,550, as amended and supplemented, the Argentine Capital Markets Law, the CNV Rules and other applicable Argentine laws and regulations, govern the capacity and corporate authorisation of the Issuer to execute and deliver the New Notes, the authorisation of the CNV for the public offering of the New Notes in Argentina and certain matters in relation to meetings of holders.

In these cases, non-consenting bondholders would be entitled to challenge the decision before the New York courts alleging a violation of New York law,[12] or, in the case of a violation of Argentine law regarding – among others – procedural matters relating to the meeting of holders, before the Argentine courts of the domicile of the debtor, pursuant to Article 14 LON and Articles 354, 355 and 251 LGS.

Second, once the debtor files the APE before the Argentine competent court, non-consenting creditors could file a legal objection to the APE within 10 judicial days following the last publication of public notices. The challenge may only be sustained on omissions or misstatements of the assets or liabilities claimed by the debtor, or the non-existence of the majorities required under Section 73 of the ABL. Although not expressly prescribed in the law, bondholders could also challenge the APE on the grounds that it is abusive or fraudulent.[13]

Further, and during a six-month term from the court approval date, non-consenting bondholders may also decide to seek the nullity of the APE on grounds discovered after the expiration of the opposition period.[14] Challenges should be based on (1) a fraudulent misrepresentation contained in the debtor’s statements on assets and liabilities; or (2) a fraudulent creation of non-justified preferences in favour of certain creditors that, in either case, is revealed after the expiration of the opposition period. We are not aware of court decisions that have decide to nullify court approval based on this provision.

What effects would the restructuring plan have on third-party guarantors?

Argentine law authorises the debtor and its affiliates to file jointly as members of an ‘economic group’, provided the cessation of payment of any of its members may affect the other members of the group (Articles 65 and 66 of the ABL). Alternatively, guarantors of the debtor, whether members or not of the economic group, may also file before the same court within 30 days as of the last notice published in the Official Gazette.

Therefore, in such cases when debtors and guarantors (or joint debtors) file for reorganisation and request the approval of their APE, there is no doubt that the restructuring plan may include the release of the guarantees granted by any of such debtors.

When guarantors stay out of the APE and do not file, the general rule of the ABL – applicable both to the plan confirmed under a concurso preventivo and an APE – is that court confirmation does not release guarantors and joint debtors from the obligations included in the plan.[15]

Therefore, creditors would be entitled to demand full payment from guarantors and joint debtors according to the original terms of the obligation. The basis for this solution lies in the fact that guarantors and joint debtors assumed their obligations in their true and full extent and the restructuring agreement does not imply a partial remission of the debt in favour of guarantors.

It is unclear under Argentine law whether such release of a non-debtor guarantor may be obtained through the inclusion of an express provision in the restructuring plan that obtains the support of the required majorities and is confirmed by the court.

How are absent and abstained bondholders computed for in the calculation of majorities in the case of an APE?

For the APE to be approved, it is necessary to obtain the affirmative vote of an absolute majority of unsecured creditors (headcount requirement) representing two-thirds of the total unsecured liabilities (capital requirement). Both majorities are calculated exclusively in relation to the unsecured creditors affected by the restructuring agreement.[16] The consent of bondholders must be given at a validly convened meeting of bondholders, with the required quorum present, or through any other means set forth in the bond terms and conditions. At this meeting, consenting bondholders would be represented by an agent as per the authorisation and power of attorney granted in the consent solicitation.

The meeting may take place prior to the APE filing or be summoned by the court after the filing. Once validly summoned, Article 45 of the ABL will apply: to calculate the headcount majority of creditors, all the votes of holders supporting the APE will be considered as cast by one person and all the votes opposing the APE will be considered as cast by one person, regardless of the actual number of holders voting for or against the APE; and to determine the majority in terms of capital, the aggregate principal amount of any of the debt securities consenting to the APE will be calculated.

The law does not establish how absent bondholders and those who abstained from voting should be computed. While the general rule in Argentine law is that absent and abstained parties should be computed as negative votes, courts that were called to construe this provision have consistently decided that neither of them should be included in the calculation base for the majorities.[17] It is therefore of utmost importance that non-consenting bondholders adopt an active role and effectively participate in the bondholder meeting (or in such other technique set forth in the bond terms to approve amendments) summoned to consider the APE.

Can a debt exchange offer (to be later filed as an APE) offer better terms to accepting bondholders than to non-accepting bondholders?

It has become normal under liability management transactions to offer slightly better conditions to such bondholders that accept to participate and vote in favour of the proposed amendments to the existing bonds prior to a certain date.

These sweeteners may be in the form of increased consideration, payable in cash or in additional bonds and may relate to unpaid accrued interest or to some other element, as a consent solicitation payment. All these techniques are oriented to induce bondholder participation and minimise holdouts. We are not aware of Argentine case law that has invalidated any of these techniques in cases of consensual exchange offers or solicitation of consents.

It is still unclear if these differences would be accepted by an Argentine court, in such cases when the debtor decides to file that APE to impose its terms on non-consenting bondholders. While there may be sound business reasons to sustain the validity of the more advantageous terms of the offer to participating bondholders, particularly in such cases when the terms of the offer would have been clearly disclosed in the restructuring documents, we are inclined to think that – if called to decide – the courts would be unwilling to accept a differentiation in the treatment, particularly when the differences are material.

Article 52 of the ABL (which is regulated under the concurso preventivo rules but applies to the APE by analogy) sets forth that the plan cannot include any ‘discrimination’ against non-consenting classes. The law defines ‘discrimination’ as the restriction to non-consenting creditors included in a dissident class to choose – after the confirmation of the plan – any of the proposals agreed with the classes that have voted in favour.

Therefore, in case non-consenting bondholders allege (and prove) that they are getting a worse deal than those bondholders that have accepted the proposal, the court would likely allow non-consenting bondholders to choose within the same options offered to consenting bondholders. However, in such cases where the differences are minor, the litigation costs plus the uncertainties of submitting the dispute to an unknown forum may induce bondholders to accept the offer prior to the expiration date.

Conclusion

In the past two decades, the APE has proven to be an efficient tool for large Argentine companies in distressed situations. It is important that a future amendment to the ABL takes the opportunity to incorporate the changes needed to limit an abusive use of the instrument (particularly for SMEs), without imposing further court intervention or limiting flexibility to the debtor in the case of large debtors (companies with shares listed or bonds issued in the market).

Footnotes

[1] Tomás M Araya and Martín Torres Girotti are partners at Bomchil. [2] The Argentine crisis of 2001/2002 was a major economic and political crisis caused by unsustainable economic policy, high debt levels and a fixed exchange rate system. It led to a deep recession, a default on external debt and social unrest. The crisis exposed the weaknesses of the country’s economic model, resulted in widespread poverty and unemployment, and triggered significant changes in Argentina’s economic and political landscape. [3] Approval requires the affirmative vote of an absolute majority in number and two-thirds of the aggregate principal amount of unsecured creditors – not counting those who are excluded by law pursuant to Article 45 (i.e., partners, administrators and their spouses, relations within the fourth degree of consanguinity, second of affinity or adopted, and their assignees within the year prior to the presentation). No administrator or trustee is appointed by the court and therefore the proceedings to obtain the court approval are much easier and less costly than a full concurso preventivo proceeding. [4] Normally, the alternatives for large Argentine debtors facing a financial distressed situation would be: (1) launch an offer to repurchase the outstanding bonds; (2) seek an amendment of the terms of the existing bonds, through a consent solicitation; (3) launch an exchange offer and an amendment of the terms of the existing bonds, and a consent solicitation to agree to an APE’s proposal; (4) launch a consent solicitation to agree to an APE’s proposal; and (5) directly file for concurso preventivo, a reorganisation judicial proceeding. We have discussed these alternatives in ARAYA Tomás – CARRO Lucía ‘Recent Financial Restructuring Developments in Argentina’, Latin Lawyer. The Guide to Restructuring, 2nd. Edition, 2022. [5] Compañía Latinoamericana de Infraestructura & Servicios S.A. (CLISA), Exchange Offer Memorandum and Consent Solicitation Statement, dated 15 July 2021, was one of the examples in which this alternative was used. In this case, the exchange offer with exit consents and consents to execute an APE agreement received the support of bondholders representing 97 per cent of the old bonds and therefore the company decided not to execute nor file the APE agreement. [6] Of course, there have been exceptions where the debtor and its controlling shareholders managed to delay conclusion of the proceedings to diminish creditors’ recovery. [7] During the pandemic, several bills to amend the ABL were filed before the Argentine National Congress by different political parties. Generally, they contemplated the suspension of executions and bankruptcy filings for a certain period of time; the extension of exclusivity periods for ongoing preventive bankruptcies; the possibility to reformulate proposed preventive agreements that have been submitted and even approved; the suspension of the prohibition to file for bankruptcy again within the current inhibition period; mechanisms for public or private financing for insolvent debtors; the implementation of innovative mechanisms aimed at achieving greater efficiency in terms of time and money, such as the figure of conciliation or conciliation mediation, or the simplified corporate restructuring process, etc. None of those bills was passed. [8] Brazil passed relevant changes to the Bankruptcy Law through Federal Law No. 14,112/2020, which was approved in December 2020 and entered into full force and effect in January 2021. Chile is also in the process of amending its 2014 Bankruptcy Law, with a draft bill being approved by the Senate. [9] These bonds would have normally been issued by an Argentine issuer under Rule 144A and/or Regulation S of the Securities Act, but also – as the local issuer would be making a public offering of securities – Argentine laws would apply, mainly the Argentine Capital Market Law and the Argentine Negotiable Law. See ARAYA Tomás – CARRO Lucía ‘Recent Financial Restructuring Developments in Argentina’, Latin Lawyer, The Guide to Restructuring, 2nd Edition, 2022. [10] National Commercial Court of Appeals, Room D, ‘Delafield Overseas Corp. S.A. v. Hidroeléctrica Piedra del Águila S.A.’, 9 September 2004, ED 210, 463. [11] A similar discussion has taken place in the UK (‘Assenagon Asset Management SA v Irish Bank Resolution Corp Ltd’ [2012] EWHC 2090 (Ch)) and in the US (‘Federated Strategic Income Fund v. Mechala Group Jamaica Ltd’, 1999 WL 993648 (S.D.N.Y. 1999); ‘YRC Worldwide Inc v. Deutsche Bank Trust Company America’, 2010 WL 2680336 (D Ct Kan 2010); and ‘Marblegate Asset Mgmt. v. Education Mgmt. Corp.’, 75 F.Supp.3d 592 (S.D.N.Y. 2015). See PEEL, Robert, ‘Assessing the legality of coercive restructuring tactics in UK Exchange Offers’, Journal of Law and Jurisprudence, Vol. 4, Nº 162, 2015, p. 182, available at https://discovery.ucl.ac.uk/id/eprint/1469728/1/07_Peel_Coercive_Restructuring_w_DOI.pdf (date of access June, 20, 2023) and LIU, Benjamin, ‘Exit Consents in Debt Restructurings’, 13/02/2017, available at https://ssrn.com/abstract=2916453 (date of access June, 20, 2023) [12] See Tennembaum Living Trust and Merkin Family Foundation vs TGLT S.A. and THE BANK OF NEW YORK MELLON, case No. 1:20-cv-6938, before the United States District Court of the Southern District of New York. [13] Article 52 in fine of the ABL (applied to the APE by analogy) [14] The possibility of requesting the nullity of the court approved plan is recognised in the ABL regarding the acuerdo preventivo approved under a concurso preventivo proceeding, but would apply to the APE by analogy. [15] As a general principle, and unless otherwise established in the mortgage, these rules also apply to non-debtor mortgagors as they are comparable to guarantors, having assumed accessory obligations in favour of a third party with the creditor’s consent.. [16] Certain creditors are not counted among those that have voting rights and, therefore, are excluded from the creditors on which the majorities are calculated. Normally, the bond terms would exclude from the calculation all bonds owned directly or indirectly by the issuer or any of its affiliates. Further, Article 45 of the ABL provides that, in the case of corporate debtors, creditors that are controlling shareholders shall have no voting rights and their claims shall not be taken into consideration. [17] See, inter alia, National Court of Appeals on Commercial Matters, Chamber A, 07.01.2004, in re Multicanal S.A. s/ acuerdo preventivo extrajudicial; ídem, Chamber D, 06.22.2002, in re Sociedad Comercial del Plata s/ concurso preventivo.

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