We won’t cry for Argentina: Will NML Capital Ltd v Republic of Argentina change the status quo? – Part I

In December 2001, the Republic of Argentina announced a temporary moratorium on its debt service payments in the midst of a financial crisis and defaulted on more than US$95 billion in external debt. This constituted the biggest sovereign default in history of its time. A debt restructuring exercise of monumental proportions proved inevitable. In 2005 and 2010, the Republic initiated two exchange offers, allowing holders of old defaulted bonds to exchange their bonds for new debt at less than 30 cents on the dollar. After the two exchange offers, Argentina managed to restructure over 91 per cent of external debt on which it had defaulted in 2001. Unfortunately, there were no contractual mechanisms in the old bonds to compel the remaining minority of old bondholders to accept Argentina’s exchange offer. Distressed debt hedge funds, known pejoratively as ‘vulture funds’, purchased large amounts of Argentina’s debt at significant discounts on the secondary market and refused to participate in the exchanges. These holdout creditors then sought full collection of their debt through aggressive litigation.