Argentina’s proposal for a new debt swap as a way to resolve its holdout debt battle will, of course, never fly with the hardline holdout funds themselves.

But as the Second Circuit Court of Appeals deliberates how to resolve this thorny, market-spooking case, what about the other holdouts out there, the ones not involved in this New York litigation?

Eugenio Bruno, an Argentine lawyer and debt specialist at law firm Garrido, who is advising exchange bondholders, investment banks and holdouts that want a new exchange, says a new swap could be a big success with them: “Today, a swap would have at least 80 per cent acceptance. There is fatigue with litigation after 12 years of not getting any results.”

He bases that on conversations he has had with non-litigant clients as well as holdouts who are not clients of his.

One of the arguments inclining non-litigant holdouts towards taking an offer if Argentina does put it on the table is, he says, “… a certain conviction that even with favourable sentences, they won’t get paid since sentences add up to a potential $20bn”.

Argentina’s central bank reserves are, remember, creeping ever lower and now stand at $40.4bn. But Bruno reckons some investors have had a speculative eye on a possible swap as a way to turn a fast profit: “There are a lot of non-litigant investment funds which bought [defaulted debt] in the last few months and with a swap would get a profit of at least 30 per cent.”

You can see the appeal of a swap from Argentina’s point of view: it would pay off most of its outstanding holdout creditors, with bonds (not cash), over a long period of time, and isolate the funds it considers true “vultures”, thus seeking to water down their bargaining power.

But from a holdout’s perspective, why take a swap before the court has ruled, while there is still a chance of victory for Elliott and a hope that other holdouts could leverage that legal precedent to get paid, too?

The Second Circuit has asked the Elliott-led holdouts to respond in writing to Argentina’s cram-down proposal by April 22. Vladimir Werning at J.P. Morgan acknowledges that this back-and-forth – asking Argentina first to spell out its payment offer, and giving the holdouts time to reply – represents “an active attempt to sponsor a dialogue between the parties. We believe it is in the Court’s interest to do so in order to spare the Judges the discomfort of a ruling that requires choosing one of ‘two evils’ (either a 100% formula or a ‘cram down’)”.

Still, he is not convinced it will work.

Argentina has hinted that if the court doesn’t buy its 2013 swap plan, it will shift payment of its exchanged bonds somewhere else so that it can keep paying them in line with its commitment, and ability, to service its performing debt. Werning sums up potential Plan B scenarios thus:

· A ‘democratic’ re-routing: A supra-majority vote by restructured bondholders can change the terms—including payment location—on the existing NY/UK law bonds (Collective Action Clauses allow a ‘cram down’ of dissenting investors);

· A ‘dictated’ re-routing: A direct Argentine offer for investors to tender existing NY/UK law bonds into new ARG law bonds;

· A ‘stealth’ re-routing: A secondary market purchases by an Argentine agency of existing NY/UK law bonds (but settled with simultaneous delivery of new ARG law bonds);

· A ‘force majeure’ re-routing: A restructured bondholder vote to adopt an off-shore trustee in response to a resignation of BoNY (providing a 90-day notice).

But let’s not get ahead of ourselves… Stay tuned.

Related reading:
Argentina hints at payment rerouting, FT.com
Why Argentina’s behaviour must not be allowed to stand, beyondbrics
Argentina reveals payment offer to holdouts, beyondbrics

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