Identifier
Created
Classification
Origin
08BUENOSAIRES1316
2008-09-22 16:19:00
CONFIDENTIAL
Embassy Buenos Aires
Cable title:  

ARGENTINA: CMS INTERNATIONAL ARBITRATION CASE END

Tags:  EINV ENRG ECON AR 
pdf how-to read a cable
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DE RUEHBU #1316/01 2661619
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O 221619Z SEP 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2079
INFO RUCNMER/MERCOSUR COLLECTIVE IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE
C O N F I D E N T I A L BUENOS AIRES 001316 

SIPDIS

EEB/OIA FOR WSCHULZ, GHICKS, NHATCHER
L/EB FOR LCAPLAN

E.O. 12958: DECL: 9/22/2028
TAGS: EINV ENRG ECON AR
SUBJECT: ARGENTINA: CMS INTERNATIONAL ARBITRATION CASE END
GAME

REF: '07 BUENOS AIRES 1352

Classified By: Economic Counselor D. Climan. Reasons 1.5 (B,D)

------------------------
Summary and Introduction
------------------------

C O N F I D E N T I A L BUENOS AIRES 001316

SIPDIS

EEB/OIA FOR WSCHULZ, GHICKS, NHATCHER
L/EB FOR LCAPLAN

E.O. 12958: DECL: 9/22/2028
TAGS: EINV ENRG ECON AR
SUBJECT: ARGENTINA: CMS INTERNATIONAL ARBITRATION CASE END
GAME

REF: '07 BUENOS AIRES 1352

Classified By: Economic Counselor D. Climan. Reasons 1.5 (B,D)

--------------
Summary and Introduction
--------------


1. (SBU) Bank of America's Blue Ridge distressed asset
investment fund in May 2008 purchased a final ICSID
(international arbitration) award judgment against the GoA
from CMS Energy with a face value of roughly US$ 180 million
along with CMS' 23% equity stake in TGN, a major Argentine
natural gas pipeline company. This CMS award has attracted
considerable attention in Argentina and in the wider
international arbitration community because it is the first
concluded judgment against the GoA for measures the
government took in the aftermath of the 2001/2 economic
crisis, including the freezing of public sector utility
tariffs. The economic crisis and the GoA's response wiped
billions off of balance sheets of foreign multinationals who
had invested in privatized utilities here. The CMS award
also achieved some notoriety because of the GoA's non-payment
to date (based upon the GoA's interpretation of ICSID
Convention provisions that would have required CMS to
"execute" the arbitration judgment in local Argentine courts)
and because CMS's lack of faith in the GoA's ultimate
willingness to pay led it to sell down this contingent asset
to Bank of America at a substantial discount. For may in
Argentina's legal community, the GoA's non-payment on this
ICSID judgment represents a challenge to the viability and
integrity of the broader ICSID international arbitration
discipline.


2. (C) Blue Ridge officials see no/no GoA political will to
pay this ICSID judgment outright. They do not intend to
submit their ICSID judgment through local courts for fear of
subjecting the claim to years of GoA-inspired/abetted
procedural and perhaps constitutional challenges. Instead,
they seek to cut a deal with the Kirchner administration and
view their holding of CMS' shares in the TGN pipeline network
as a sweetener that should make a prompt settlement
attractive to the GoA. Blue Ridge alleges that the GoA's
hardball strategy entails: (1) "encouraging" Blue Ridge to

sell its ICSID claim cheaply to a local crony of the Planning
Ministry, who would share profits of a later GoA ICISD
payment with GoA officials; (2) holding GoA approval of TGN
tariff increases and concession renewal hostage to an
internal settlement that would force other TGN shareholders
(including France's Total, the Argentine Soldati Group, and
the Argentine multinational Techint Group) to compensate Blue
Ridge. For its part, Blue Ridge's equally hardball strategy
is to encourage a "fair" price purchase of its ICSID award
and TGN share assets by either the GoA or a local player and
to threaten to sell both off to "less friendly" distressed
asset (aka vulture fund) players like the Dart or Elliott
Groups, renowned for their own hardball litigious tactics in
maximizing the values of their distressed sovereign asset
portfolios. Blue Ridge's approach speaks to a new, end-game
phase in the settlement of ICSID claims against Argentina and
the view of distressed asset funds that ICSID claims are an
attractive class of assets to be appropriately discounted and
traded. End Summary and Introduction

--------------
Bank of America Fund Buys CMS ICSID Award
--------------


3. (C) Bank of America's Blue Ridge Investment Fund, a
distressed asset fund, acquired in May 2008 the final
judgment awarded to CMS Energy's by the World Bank,s
International Center for the Settlement of Investment
Disputes (ICSID) along with CMS 23% stake in Argentina's
regulated natural gas pipeline company TGN. Local market
players report that B of A paid roughly 30% of the nominal
award value of approximately $180 million ($133 million award
plus accrued interest. (In a July meeting with EconCouns,
Blue Ridge representatives declined to disclose its purchase
price, but said it was an "attractive" opportunity.)


4. (SBU) The terms of CMS' original ICISD settlement offer to
the GoA allowed the GoA a US$ 2 million bargain purchase
option on CMS' TGN shares, conditional on the GoA paying CMS
its ICSID claim in full by May 2008. The GoA did meet this
condition precedent, but through GoA minister-ranked Treasury
Attorney Osvaldo Guglielmino it still sent a May 2008 letter
"exercising" its claim on the TGN shares shortly before the
option period expired. Blue Ridge counsel argues that the
GoA exercise letter is without legal/contractual merit and
notes that Blue Ridge submitted details of its purchase of
the CMS ICSID contingent asset and TGN shares to the GoA's
ENARGAS (natural gas regulator),to the Comision Nacionale de
Valores (SEC equivalent),and to the Caja de Valores (stock
exchange transfer entity). None of these agencies objected
to the transfer.

--------------
Blue Ridge: ICSID Debate "Not an Issue"
--------------


5. (C) In a September 15 meeting with Blue Ridge local
counsel Roberto Fortunati, EconCouns reviewed the extensive
debate within the ICSID arbitral community over the GoA's
controversial interpretation of ICSID convention articles.
The GoA, through Treasury Attorney Oswaldo Guglielmino,
interprets these articles to require claimants who have won
final ICSID judgments to execute their award through the
local court system, according them equivalent treatment to
that enjoyed by other domestic private creditors. (In May
2008, the State Department Office of International Claims and
Investment Disputes sent a letter to an ICSID tribunal
detailing its disagreement with this GoA interpretation.)
Prior to CMS' sale of its ICSID claim to Blue Ridge,
Guglielmino had complained to CMS counsel and EconCouns that
"extraordinary flaws" in the ICSID ruling on the merits of
the CMS case were personally offensive to him and,
practically speaking, would ultimately require an Argentine
Supreme Court review to make any GoA payment politically
acceptable.


6. (C) In August conversations with EconCouns, Guglielmino
emphasized that he wants to see the GoA meet its ICSID
obligations. To this end, he hopes to assuage ICSID claimant
concerns that the GoA is demanding claim execution through
local courts as a payment delay strategy by asking the
Argentine Supreme Court to issue an informal statement
clarifying that any ICSID execution claim submitted to local
courts should be handled expeditiously and that the Supreme
Court was not/not disposed to hear domestic appeals on final
ICSID awards. (Post's informal contacts with Guglielmino's
staff indicate that Guglielmino has yet to approach the
Supreme Court on this.)


7. (C) Blue Ridge counsel Fortunati calls the ICSID Article
53/54 debate moot. The investment fund has no/no intention
of submitting its claim through local courts lest it be
subject to years of GoA-inspired/abetted procedural and
perhaps constitutional challenges. Its was CMS' pessimism
regarding the GoA's willingness to make any final payment on
its ICSID award, Blue Ridge said, that prompted CMS to sell
down this asset to Blue Ridge so cheaply.

--------------
Blue Ridge: ICSID Assets An Attractive Play
--------------


8. (C) In a July and August conversations with Post, Blue
Ridge officials, including New York based principals Jim
Garvey and Federico Marini and local Buenos Aires counsel
Roberto Fortunati, make clear they hope to "flip" these ICSID
and TGN assets quickly. Blue Ridge principals consider
themselves "opportunistic" fund managers who say they want to
cut a deal with the Kirchner administration and see their
holding of shares in TGN, one of Argentina's two major
natural gas pipeline networks, as a sweetener that should
make a prompt settlement attractive. Beyond this CS claim,
Blue Ridge noted that they are looking to purchase additional
one-off ICSID claims against the GoA, which they see as
potentially far more profitable asset plays than, for
example, buying and holding GoA sovereign obligations in the
hopes that the CFK administration will come to terms with
bond holdouts.

--------------
(C) Blue Ridge: GoA Crony Capitalism Approach
--------------



9. (C) Blue Ridge officials agreed that the GoA has little
political incentive to pay off this potentially
precedent-setting ICSID award because it is the first case
deriving from the 2001/2 crisis-linked that has survived an
ICISD "annulment" appeal and so completely terminated the
ICSID process. (The GoA has requested annulment of every
ICISD final award to date, an appeal process that adds an
additional 18-odd months to the ICSID arbitral process. A
number of additional final ICSID annulment rulings against
Argentina are anticipated in the next 6-12 months.) Blue
Ridge says they have tried to present themselves to the GoA
as a "partner" in coming to terms with numerous pending ICSID
judgments rather than "just another predatory vulture fund."
They note that, beyond its holdings of Argentine distressed
assets, Blue Ridge has also invested in debt and equity in
productive Argentine assets, including in the Village Cinemas
movie chain.


10. (C) In early September 2008 conversations with EconCouns,
Blue Ridge officials see the GoA's most likely strategy as
one attempting to force TGN to settle with Blue Ridge. They
speculated that the GoA would hold pending TGN tariff
increases hostage to a settlement of the ICSID suit and rely
on the "enlightened interest" of other TNG shareholders to
cut a deal with Blue Ridge and pay them some percentage of
its ICSID award in exchange for the transfer of TGN shares.
Blue Ridge holds a 23.5% stake in TGN. Another 20% of TGN is
publicly (albeit thinly) traded while 55% is owned by the
Gasinvest consortium. Gasinvset, in turn, is owned by
France's Total (30%),CGC (30%, owned by the Argentine
Soldati Group and private equity firm Southern Cross),
Argentine multinational Techint Group (30%) and Malaysia's
Petronas Group (10%). The current market capitalization
value of TGN shares is roughly estimated at $90-100 million.
Despite having had its domestic gas transportation tariffs
effectively frozen since 2001, TGN is reportedly cash-flow
positive because 50% of its revenues derive from long term
gas export contracts, primarily to Chile.


11. (C) In a follow-on September 18 conversation with
EconCouns, Blue Ridge principal Federico Marini interpreted
the GoA strategy. He had earlier that day met with Jorge
Gustavo Simeonoff, Executive Secretary of the GoA's Unit for
Reconciliation and Analysis of Public Service Contracts, an
entity set up following the 2001/2 economic crisis to
negotiate public utility tariffs with concession owners.
According to Marini, Simeonoff indicated that the GoA would
"play hardball," holding off a planned 20% TGN tariff
increase and threatening to cancel the TGN gas transport
concession outright unless a resolution acceptable to the GoA
is finalized by year-end 2008. Furthermore, Marini reported
that he had been contacted by a representative of a local
group which he called one of Planning Minister De Vido's
crony-capital fronts. The representative told Mariani that
his group had been designated as the GoA's preferred buyer
for both Blue Ridge's TGN shares and the ICSID award.


12. (C) Mariani anticipates that that this local group will
make Blue Ridge a lowball offer in the range of 5-10% of the
value of the $180 million ICSID claim, an offer which Blue
Ridge will refuse. Mariani believes that the GoA game plan
is to attempt to force Blue Ridge to sell the ICSID award and
TGN shares to this local group, then allow the local holder
of the award to settle the ICSID claim with the GoA for a
considerably higher discount to face value, and share the
crony's proceeds with GoA officials, including Planning
Minister De Vido. Other TGN shareholders would be encouraged
by the GoA to separately compensate Blue Ridge in order to
win the planned 20% tariff increase and retain their TGN
concession.


13. (C) For Blue Ridge's part, Mariani says he told Simenoff
that Blue Ridge principals are, at heart, traders with a
pragmatic worldview. He suggested to Simenoff that Blue
Ridge/Bank of America wants to be seen by the GoA as a
reliable partner but that, if unduly pressed, Blue Ridge
would consider selling off its ICSID and TGN holdings to
"less friendly" distressed asset players like the Dart or
Elliott Groups (renowned for their own litigious tactics in
maximizing the values of their distressed sovereign asset
portfolios).


14. (C) Mariani appreciated Embassy support to date and,
given U.S./GoA BIT provisions on respecting international
arbitral awards, he asked that the Embassy continue "quiet
advocacy" with the GoA, encouraging the government to respect
the integrity of the ICSID process and keep their payment
promises.

--------------
Comment
--------------


15. (SBU) Now, almost seven years after Argentina's December
2001 economic implosion and the largest sovereign default in
world history, much attention has been focused on the GoA's
recent declaration that it will pay off $7-odd billion in
Paris Club credits and on new initiatives to encourage the
GoA to settle on over $20 billion in outstanding claims by
holders of defaulted Argentine bonds. Less attention has
been paid to a third legacy of the economic crisis, the
billions in outstanding arbitral claims against the GoA by
foreign investors, the value of whose Argentine holdings were
dramatically reduced by measures adopted by the GoA in the
aftermath of the economic crisis. As a consequence,
Argentina today holds the unfortunate distinction of having
over 30 outstanding arbitral cases pending at ICSID, the
largest single country number of outstanding arbitration
cases.


16. (C) Blue Ridge's allegation that the GoA has identified a
local crony to purchase its CMS ICSID asset with an intent to
share profits flowing from a later GoA ICSID settlement with
GoA officials is reminiscent of another recent case: the
February 2007 GoA Planning Ministry-abetted diversion of
Petrobras' sale of its shares in an Argentine electricity
transmission major from a U.S. investment fund to a local GoA
contactor (Reftel) appears to have followed a similar
pattern. Such reprehensible behavior aside, the creative and
pragmatic arbitration award settlement strategies of
intermediaries like Blue Ridge speak to a new end-game phase
in the drawn out ICSID arbitration process. "Vulture fund"
Blue Ridge belongs to a new class of financial market players
who see ICSID claims against Argentina as just another
attractive class of assets to be appropriately discounted and
traded.
KELLY