Eko Brands, LLC, v. Adrian Riviera Maynez Enterprises, Inc. et al. (Order Awarding Prejudgment Interest, June 14, 2018)

Let’s briefly discuss bonds… so that we can then discuss sovereign debt issued by Argentina*, so that we can turn our ultimate attention to the Western District of Washington.

In exchange for immediate access to cash, a bond-issuer typically promises to return that cash amount at some future specified date, and agrees to provide some additional stream of cash to compensate the lender for the loan.

The date when the borrowed cash is returned is called the bond’s “maturity.”

The stream of cash that forms compensation informs a bond’s “yield.”

For example, if I lend an old college roommate $100 for 10 years, and the ex-roommate agrees to pay me $6 each year on the anniversary of our agreement, the bond is said to have a 10-year maturity and is said to “yield 6%” (i.e., $6/$100 = 6%).

Bonds can be bought & sold on the open market. Using our prior example, let’s say that upon making my $100 loan for 10 years, I immediately turn around and sell the obligation to you for $105.  Now, you have paid $105 for the annual $6 anniversary payment from my ex-roommate, and you can be understood to have purchased a bond yielding $6/$105 = 5.7142857%.

This example demonstrates the seesaw relationship between bond prices & yield, and the oft-encountered maxim, “Rising bond prices = lower yields.”

(The counter is also true: “Falling bond prices = higher yields.”)

Presumably, those who would lend money to a borrower will take care to demand a rate of interest/return commensurate with the associated risk.  To continue with our example, if I lent my ex-roommate $100 at 6% 20 years ago when we were college roommates, and said-roommate never paid me back, when said-roommate comes to me again looking for another $100 loan, I will reasonably include prior experience with failure-to-pay in assessment of risk of any further loan.

Perhaps now I will insist on $15 per year, for an effective yield of 15%.

This is the relationship between assessed risk and rate of interest/return/yield:  the higher the former, so commensurately high should be the latter.

Countries also issue (sovereign) debt.  For example, the U.S. Treasury as of June 28, 2018 has issued $21,149,679,487,479.03… or “just over” $21 trillion (to the extent that $149 billion is worthy of rounding…).

Other countries issue debt, too: for example, Argentina!

Argentina is an interesting case, because successive governments there have issued debt, but then failed periodically to pay it back (like our college roommate example above).  The history is complicated, and we will not belabor you with details beyond observing that Argentina has defaulted on its external debt (and its internal debt) multiple times throughout its 200 year history, including in 2001, when it defaulted on +$100 billion in what was then the largest sovereign default in history.

Which made it all the more surprising 1 year ago when Argentina successfully issued $2.75 billion in bonds with a maturity of 100 years (a.k.a., “century bonds”).  Which is to say that if you participated in that issuance, you were extremely unlikely ever personally to receive back upon maturity the sum of money you originally lent.  Because you’ll likely have been dead for decades – so sorry – when the debt matures.

What was the yield demanded by lenders of this 100-year bond issuance from a party that has demonstrated periodic incapacity/unwillingness to make good on its debt obligations? About 7.9%.  So, while you are not likely to be around when the debt comes due, at least as a participant you enjoy the promise of a stream of payments worth 7.9%, and that ain’t nothin’.

But alas now (exactly one year later today!), Argentina’s economy is in trouble… again.

And the prospects of timely payment are being drawn into question… again.

And the price of those 100 year bonds is falling in the open market, because investors familiar with the country’s credit history observe its immediate prospects.

And as the price for those bonds falls in the open market, the seesaw of their effective yield is on the rise… approaching 10%.

If you are comfortable with the certainty that Argentina, despite its history of relatively recent (and spectacularly large) default, will pay you back in (now) 99 years, you can enjoy a yield of over 9%!

And that might seem attractive, perhaps especially so in a low-rate world where the 30-year Treasury bond from Uncle Sam yields a paltry ~3.0%.

But you need to ask yourself, “Is the yield commensurate with the risk?”

Which brings A2C back to its park bench with the pigeons….

A recent order from the Western District of Washington caught our attention. Why?


“12 percent?!”

Let’s quickly verify the math…

12% Annual Rate X $66,087.76 = $7,930.53 for an entire year.

132 days/365 days = ~36.1643836% of the year.

$7,930.53 X 36.161643836% = $2,868.027 = $2,868.03.

$2,868.03 + $66,087.76 = $68,955.79.

The math is impeccable! Kudos!

Here’s the thing….

In a world where the effective yield on a serial sovereign defaulter’s 99-year bond remains under 10%, we are hard-pressed to defend on an economic or financial basis 12% statutory rates for prejudgment interest.

* Had Argentina failed to advance to the Round of 16 at the World Cup, A2C would not have piled on needlessly. Instead, we could have used the corporate bonds from some struggling retail chains, such as 99 Cents Store yielding ~11.8% (CUSIP: 65440KAB2), or JC Penny yielding ~11.9% (CUSIP: 708130AC3).  Some small distressed energy concerns also have corporate bonds out there with effective yields approaching 12%.