Argentina: The Good, The Bad And The Impractical: Argentine Regulators Draw The Line On Public Offerings

This article reports on a significant joint resolution issued last week by the Argentine tax and securities regulatory authorities (the "Joint Resolution"). The Joint Resolution endeavors to clarify the meaning of "public offering" and to resolve various uncertainties concerning the issue of tax-exempt debt securities. Unfortunately, the safe harbor spelled out by the Joint Resolution may not prove practical. Read on for a description of the new rules and a brief analysis.  

The 1990s witnessed an unparalleled number of corporate bond issues in Argentina. Through most of the decade, international capital markets maintained a nearly insatiable thirst for Argentine corporate paper and issuers were attracted by relatively low interest rates. A key statute, the Negotiable Obligations Law,2 added to the elixir a tax exemption on interest payments for "publicly offered" debt securities qualified by the National Securities Commission (the "CNV"). This exemption infused bond issues with a quality that other instruments, such as bank or shareholder loans, did not share.

As the capital markets began to run dry toward the latter part of the decade, issuers were tempted to maintain the tax-efficient structure by cloaking syndicated bank loans or shareholder contributions as bond issues. "Public" in form only, these bond issues were targeted to a single purchaser (e.g., a shareholder or bank) or a discrete group of purchasers (e.g., a commercial bank syndicate). The Argentine tax authority (the "AFIP") grew wise to this practice and, in the last two years, has launched inspections of more than 80 bond issues to determine if they were genuinely offered to the public. In several cases, the inspections have led to million-dollar assessments for unpaid taxes (withholding taxes and VAT), interest and penalties.

While in some cases the inspections have been warranted, others have been flatly misguided. In one case, the AFIP has scrutinized a "Yankee bond" (registered notes sold in the U.S. public markets), which would involve an absurd cost for debt securities not genuinely offered to the public. In other cases, issuers have been faced with the daunting task of reconstructing bond offerings closed years ago to prove to a genuine public offering. The AFIP’s fervid crusade has also inhibited current bond issues, including those tied to debt restructuring exchange offers, as potential issuers have become reluctant to accept a tax exposure risk.

On September 14, 2004 the CNV and the AFIP issued the Joint Resolution (CNV Resolution 470/2004 and AFIP Resolution No. 1738) to resolve uncertainties. The Joint Resolution applies to all debt securities qualified by the CNV under the Negotiable Obligations Law, as well as debt securities issued by specifically regulated financial trusts. It defines "public offering" and mandates a certification process to qualify a debt security as tax-exempt under the Negotiable Obligations Law. Although the Joint Resolution does not apply retroactively, the rules should enable those issuers currently being inspected by the AFIP to define their risk exposure, subject to compliance with the Negotiable Obligations Law and rules invalidating form over substance.

The Joint Resolution defines "public offering" as an invitation to the general public or to a group of persons in a manner not compatible with a pre-closing agreement. To assure compliance with a public offering, the Joint Resolution specifies a safe harbor for debt securities issues, which it calls a "book building system." This book-building system requires the issuer (or its placement agent bank) to create a "demand curve" and record in a book bids, quantity and other relevant information received from interested parties. This book will determine the eventual price and quantity of the securities and must be kept in Argentina.

The book-building system further requires the issuer or its placement agent to publish invitations to bid for at least nine days. These invitations to bid must specify the indicative price or the terms to determine the definitive price. "Expressions of interest" received from potential purchasers must be recorded and "ratified" by subscription, all of which may occur on the same day. If another placement method is used, the sale may only be consummated after five trading days have elapsed.

The book-building system is a safe harbor. The Joint Resolution expressly authorizes other placement methods. Nonetheless, these other methods must be passed on by the CNV to assure transparency and equal treatment of investors.

Other aspects of the Joint Resolution distinguish compliant from non-compliant conduct, enhance prospectus disclosure requirements and impose a certification process on the issuer and its placement agent. The Joint Resolution makes clear that global offerings of securities outside Argentina through private or restricted placements (e.g., Rule 144A  offerings) do not affect the assessment of whether the securities were "publicly offered" in Argentina. For the benefit of issuers looking to restructure, the Joint Resolution clarifies that notes offered in exchange for outstanding notes placed through a public offering continue to enjoy the same status, as long as the initial purchaser of the new notes is the holder of the outstanding securities.

Finally, the Joint Resolution relies on a certification process to document the public offering. The placement agent must furnish a report on the offering and its placement efforts, along with supporting documents. This information, as well as a detailed description of the use of proceeds from the offering, must be fully set forth in the disclosure document. The placement agent must certify its general skill and experience in offering securities to the public. The certifications and the agreements governing the offering must maintained by the issuer in case of inspection.  

In endeavoring to provide clear rules for good conduct, the Joint Resolution receives mixed marks. The tax regulators have done well to move away from a restrictive definition of public offering that previously relied on whether an issue was traded on a securities exchange. They have also eliminated an unnecessary tax exposure risk that plagued debt restructuring exchange offers. Both of these actions merit praise.

The securities regulators, however, may have failed to adequately consider practical aspects of how securities markets work in fashioning their part of the Joint Resolution. The book-building system, which refers to "ratification" and a nine-day offer period does not square with common market practice of defining sales in the final moments before closing. Maintaining the book in Argentina would also appear unnecessarily unwieldy. While Argentina’s private sector is currently limited to accessing the domestic capital market, it is hard to imagine the global markets coordinating book-running through Argentina, which generally represents a small amount of the total offering.

For these and other reasons, the securities aspects of the Joint Resolution smack of the rules for which Argentina has become increasingly famous. Lawmakers and regulators anxious to correct past abuses have acted with little regard to legitimate international practices. The Joint Resolution, like many measures adopted by other regulatory agencies within the last year, may force market participants to waste time and energy on reconciling lawful conduct with an inflexible rule or, worse, throw up their hands and walk away into the sunset.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.