Raising the RUFO in Argentine bonds In case you didn't fancy ploughing through our 3,000+ words on NML v Argentina last week at the Second Circuit... Barclays" analysts have boiled down the next turning point in the pari passu saga into two paragraphs, in their March 5 note (irresistibly titled "Cram-down or sanctity of contract? Is there a way out?"): The court will have to choose between taking a cram-down of holdouts in line with US corporate bankruptcy law and the spirit of CACs, or enforce the acceleration provision of FAA bonds. We think that Argentina will also highlight that paying in full as plaintiffs are requesting not economically possible. In addition, it may claim that the November 21 orders force Argentina to breach its contractual arrangement with exchange bondholders under the RUFO clause. It is, of course, impossible to know how the court of appeals will proceed. This is the first pari passu case that has gone this far in terms of legal process, and, as such, there is no precedent for investors to use as a guide. However, these arguments might not suffice to convince the court of appeals. What does not allow us to be optimistic is that Argentina has arrived at this point in the legal process because of this court's interpretation of pari passu, a clause whose interpretation is much more debatable than the standard acceleration clause of FAA bonds. However, since the events of March 1, the possibility exists, even if remote, that the courts will entertain Argentina's cram-down proposal. This probability depends (positively) on the strength of the arguments to be submitted to the court by March 29, as well as the underlying (unknown) reasons why the court asked Argentina to send a ratable payment proposal. You can see how quickly "bankruptcy" talk has hit the mainstream after Friday's intervention by the court, which is interesting. But what's a RUFO clause again?, we hear you ask. It's those "Rights Upon Future Offers" given to bondholders who took Argentina's debt restructuring terms down the years, which we mentioned here (and - much earlier in the saga - here). The clause entitles them to the upside if Argentina "voluntarily" makes a better offer to the creditors who stayed out (that's NML and co) before 31 December 2014. As Barclays note, "the market is struggling to understand" why Argentina's counsel told three cool customers of the Second Circuit that his client "would not voluntarily obey" orders to compensate holdouts in full, but when you remember the RUFO language, it starts to makes sense. Interestingly, Barclays also argue that Argentina's rather Fabian legal strategy is designed with the expiry date of the RUFO in mind. You can imagine why: "future litigation" risk from the restructured bondholders. This is also something we often hear from Argentine perspectives on the case, so it's certainly plausible. And the timeline to 2014 is arguably doable, if Argentina really can get Supreme Court interest (as improbable as that might seem given the unanimity of how the lower courts have responded to its case). But then we know the RUFO has loopholes (incidentally, the prospectus which contains it may also allow Argentina to make "settlements" with holdouts), while we don't know when the Republic finally runs out of legal road. Whereas the exchange bondholders arguably have less room for manoeuvre following Friday's hearing. Could they sue under the RUFO if Argentina ("involuntarily") offered the holdouts new bonds better than their own? Sure, we guess so - but then surely also the bondholders would consider the time and risk of nailing Argentina to a judgement in US courts, having until now steadily collected payments from the Republic. Ultimately, what is more debatable for the Argentine government - the RUFO clause, or the acceleration clause in the holdout debt. We think that's a good question. And, finally, on the restructured bondholders" options after last week's questioning by judges apparently went so badly against their chances of payment under the courts" current order - well, there's been some speculation this week of Argentina potentially offering them a swap out of their New York law debt into bonds paying locally. This idea's come round in the saga one or two times before. There's also speculation of accelerating this year's coupons. From Jefferies this week for instance: "The prepayment of coupon payments appears like an ingenious idea to buy some time for the other more complicated strategies though there is the risk that holdouts attempt to attach these payments." Then again - Argentina has argued (and will likely argue again to the Second Circuit, as per Barclays above) that it has limited resources for big upfront payments to the holdouts, maybe making an upfront payment on the restructured a bit awkward. That, and the whole growing realisation of just how vulnerable third parties (someone would have to help the Argentine government organise a prepay) now seem to be.