March 30, 2013 1:30 pm

Argentina sticks to its guns over holdout creditor payments

Cristina Fernandez©Reuters

Argentina has told a US appeals court that it can pay holdout creditors only on the same terms as two previous debt swaps.

In a filing with the Second Circuit Court of Appeals on Friday, after being ordered to spell out its offer to holdout creditors, Argentina argued that its offer represented “substantial” returns considering the low price paid for the bonds by the funds it described as “vultures” after the country’s default on nearly $100bn in 2001.

Elliott, a US fund, is leading the holdout charge and has pursued Argentine assets around the globe for years, most recently getting an Argentine navy ship detained in Ghana for 78 days.

The legal fight that has made waves through international financial circles amid fears Argentina could plunge into a messy technical default or that sovereign restructurings could become harder in future.

In its filing, Argentina said it could offer a par bond, aimed at retail holdouts, which would pay out in full but not until 2038. For institutional investors, it offered a discount bond, payable in 2033 but with an estimated 66 per cent writedown or haircut.

Both options came with warrants linked to GDP growth, and past-due interest would be paid in cash in the par option and via a bond due in 2017 for the discount offer.

“There is no imaginable way the court could be expected to accept this. None. Especially given the 66 per cent discount offered,” said Joshua Rosner, managing director at research firm Graham Fisher.

Argentina was last year ordered by New York Judge Thomas Griesa to pay $1.33bn to creditors led by Elliott because the country had violated the pari passu, or equal treatment, clause in its bonds.

He gave the order teeth by ordering Bank of New York Mellon, the trustee of restructured bonds, not to transfer funds unless holdouts were also paid. The Second Circuit is now reviewing those issues.

Given Argentina’s oft-stated opposition to paying holdouts whose years-long crusade to collect in full it considers immoral, many believe Argentina will try to pay exchange bondholders outside New York if the court upholds the restraints on BNYM. But that is a complex plan, and the country could tumble into technical default.

If the court rules against it, Argentina, which has had other rehearing attempts dashed, may find its only hope lies with the US Supreme Court.

“The best that can happen is that they can try to stave off technical default until the Supreme Court decides whether it will hear the case,” Mr Rosner said. “If, at that time, the Supreme Court doesn’t agree to hear it, it’s an almost immediate technical default.”

Eugenio Bruno, an Argentine lawyer and debt specialist at Garrido, who is advising exchange bondholders, investment banks and holdouts that want an exchange, said the court’s demand for Argentina to spell out its offer after a lengthy hearing in February was “always a lost cause”.

“Of course it’s totally insufficient [for holdouts]. That was never in discussion. But they couldn’t do anything else with no firm sentence against it,” he said.

Argentina is bound by its so-called “lock law” not to make a better offer to holdouts and a clause in the bonds issued in the swaps meant any voluntary offer made before December 31 2014 would have to be made to exchange bondholders too. Argentina restructured more than 92 per cent of its defaulted debt in the swaps, in 2005 and 2010 and, with central bank reserves of $40.6bn, could not afford a series of me-too claims.

The court now has to decide whether or not to impose the cram-down on holdouts that Argentina is seeking or stick to the letter of the bond contracts. Argentina said in its filing that Judge Griesa’s proposed solution “would cause great harm to the exchange bondholders while giving plaintiffs a return that is exorbitant on its face, and even more so when one takes into account the estimated purchase price of the majority of plaintiffs’ debt.

It added: “For example, for [Elliott affiliate] NML, which purchased its beneficial interest in the bonds for $48.7 million, the rate of return would be 80.2% per annum, and 1,380% in total.”

Argentina acknowledges it is the court it must convince, not the holdouts, who did not comment on the offer immediately but were expected to dismiss it. The ball is now back in the Second Circuit court.

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