At least one New York lawyer is whistling a happy tune these days, and it's not "Don't Cry For Me, Argentina."
In fact, if Richard W. Cutler's Supreme Court victory for bondholders against asovereignty is any indication, Argentina could be doing the crying, and, more importantly, the paying.
"I think this [ruling] helps the foreign bond market, and particularly the bonds of emerging countries," Mr. Cutler said recently.
The little-noticed Supreme Court decision handed down June 12 clarifies the question of whether investors can sue foreign governments in U.S. courts.
The high court ruled unanimously that a group of foreign bondholders could sue Argentina in New York City after the country had defaulted on bonds payable in the United States. The court based its decision on an exception related to commercial activity within the United States that is listed under the Foreign Sovereign Immunities Act of 1976.
The late begins in 1982, when Argentina and its central bank tried to satisfy the creditors of some of its major companies by issuing bonds, called Bonods, denominated in U.S. dollars. A total of $1.2 billion was issued, scheduled to mature in 25% groups beginning on May 29, 1986, and ending in November 1987.
Most of the creditors were large U.S. banks, including Citibank. But a number of smaller creditors also participated, including two Panamanian corporations and a Swiss Bank that collectively held $1.3 million of the Bonods.
Then, a few days before May 29, the central bank notified bondholders that it intended to extend their maturities. Bondholders were asked to roll over those securities into new bonds.
When the Bonods started to mature in May 1986, Argentina decided it lacked sufficient foreign exchange to retire them. By presidential decree, it lengthened the payment scheduled and offered bondholders substitute instruments.
Mr. Cutler's three clients refused the offer and demanded full payment, specifying New York as the payment site.
When Argentina failed to pay, the three filed a breach-of-contract suit in 1989 in U.S. District Court for the Southern District of New York, relying on the Foreign Sovereign Immunities Act of 1976. Argentina and its central bank moved to have the action dismissed, but the district court denied their motion.
The U.S. Court of Appeals for the Second Circuit affirmed the lower court's decision. The Supreme Court then granted Argentina's petition for certiorari, challenging the appeals court's determination.
In his April 1 argument before the court, Mr. Cutler set out to prove that Argentina must pay its debt because its actions constituted a "commercial activity" that had a "direct effect" in the United States, one exception to the Foreign Sovereign Immunities Act.
The act was established to determine whether a state or federal U.S. court can exercise jurisdiction over a foreign state. The act says "a foreign state shall be immune from jurisdiction of the courts of the United States" unless it meets one of several exceptions.
In the Supreme Court case, Republic of Argentina and Banco Central De La Republica Argentina v. Weltover Inc., Mr. Cutler argued:
"The statute says that a commercial activity is to be judged by its nature, not its purpose. In this case the petitioners issued negotiable certificates of debt, and there is nothing uniquely sovereign about going into debt."
As for the direct-effect test, Mr. Cutler said, though the bondholders were foreigners and had purchased the bonds outside the United States, they did have a U.S. link. Bondholders chose New York out of four cities where they could receive payment.
Argentina maintained it had protection from the suit under the act because the bonds were issued to fulfill foreign exchange obligations constituting a "sovereign" activity protected under the act.
Justice Antonin Scalia wrote the opinion for the high court's unanimous decision.
"We conclude that when a foreign government acts, not as a regulator of the market, but in the matter of a private player within it, the foreign sovereign's actions are ~commercial' within the meaning of" the Foreign Sovereign Immunities Act, Mr. Scalia wrote. "We agree with the Court of Appeals ... that it is irrelevant why Argentina participated in the bond market in the manner of a private actor; it matters only that it did so. We conclude that Argentina's issuance of the Bonods was a ~commercial activity' under the FSIA."
On the direct-effect question, the justice wrote, "Because New York was thus the place of performance for Argentina's ultimate contractual obligations, the rescheduling of these obligations necessarily had a ~direct effect' in the United States: Money that was supposed to have been delivered to a New York bank for deposit was not forthcoming."
But some experts interviewed did not expect the decision to have a significant effect on how investors perceive the creditworthiness of sovereign debt.
Thomas Winslade, executive director at the Emerging Markets Traders Association, said that while Weltover is "certainly a favorable case for investors," it basically confirms what they have assumed all along.
Ricardo Kleinbaum, an analyst with Fitch Investors Service, said the ruling was unlikely to change a rating agency's perception of a sovereign credit. He noted, however, that the publicity surrounding the case may lessen investor confidence.
"The notoriety could hurt a country," he said, adding, "It draws attention to the suspension of payments." Also, the ruling may not be easy to enforce, he said.
Since the Supreme Court case, Mr. Cutler has taken on a third client, a Uruguayan company, that has just under $1 million of the bonds, he said. Also, Argentina has filed an answer and has made certain discovery requests, Mr. Cutler said. The case is now back at the district level, he added.
He said that Argentina's answer does not dispute that payment has not been made, but states instead that the country does not believe it has to pay the bondholders.
Asked about the case, Richard J. Davis, the Weil, Gotshal & Manges attorney who represents Argentina, said, "I think that right now we don't know who these entities are." After some additional discovery work, his side will make a judgment as to whether to proceed with some additional defenses, he said.
But if Cutler's side wins, how will they collect?
Mr. Cutler said while he hopes the case would not proceed to such a level, the act identifies assets that can be taken to satisfy the debt.
Friday's Market
A poor employment showing and the Federal Reserve's decision to cut the fed funds rate spurred up to $550 million in new issuance Friday despite the pending holiday weekend.
Issuers came to market after the Labor Department reported that nonfarm payroll employment in August declined by 83,000, instead of showing the 175,000 increase economists had expected.
The Labor Department figures were the immediate impetus for a fed easing later in the morning, but RJR Nabisco Inc., Dayton Hudson Corp., Pittsburgh National Bank, and Temple-Inland Inc. jumped in even before the cut. The fed funds rate moved to 3% from 3.25%.
RJR issued $100 million of 5 1/4% noncallable notes due Sept. 15, 1995. The notes were priced at 99.775 to yield 5.33%. Merrill Lynch Capital Markets was the lead manager. Moody's Investors Service rates the issue Baa3, while Standard & Poor's Corp. rates it BBB-minus.
Dayton Hudson also issued $100 million in noncallable notes, with a 7 1/4% coupon. The notes, due Sept. 1, 2004, were priced at 99.90 to yield 7.26%. Goldman Sachs & Co was the lead manager. The notes are rated A3 by Moody's and A by Standard & Poor's.
Pittsburgh National Bank issued $100 million of noncallable notes, due Sept. 10, 1993, with a 3.2% coupon. The notes were priced at par and rated Aa3 by Moody's and A-plus by Standard & Poor's.
Temple-Inland issued $250 million in unrated notes. The first series was a $100 million noncallable deal with a 7 1/4% coupon. The notes, priced at 99.762 to yield 7.27%, are due Sept. 15, 2004.
The second Temple-Inland issue was a $150 million note deal, noncallable for 10 years with a coupon of 8 1/4%. The notes were priced at 99.03 to yield 8.34% and are due Sept. 15, 2022.
Market sources said the rate cut is likely to help keep corporate issuance brisk this week.
High-yield bonds were up about 1/2 point Friday, traders reported, with quotes on certain distressed issues rising as much as two points. The high-grade sector followed Treasuries almost a point higher.
