Argentina Has Two Weeks to Cut Deal After Court Rejection
By Katia Porzecanski, Camila Russo and Greg Stohr, Jun 16, 2014 5:17 PM ET
An exchange house in downtown Buenos Aires.
Argentine Economy Minister Axel Kicillof, who negotiated $15 billion of payments to resolve debt disputes in the past four months, has two weeks to pull off his toughest deal yet.
The country’s bonds plunged today after the U.S. Supreme Court decided against hearing Argentina’s appeal of an order requiring it to pay holders of defaulted notes from 2001 when making payments on its restructured debt. The next payment on those bonds comes due June 30, giving Kicillof limited time to reach a settlement with holdouts and avoid a new default.
The government says paying back holdout creditors in full would amount to $15 billion, money that would depleteforeign reserves already hovering near an eight-year low. Locked out of international credit markets for more than a decade, Argentina may have few options besides meeting a request for negotiations from Elliott Management Corp., the New York-based hedge fund run by Paul Singer that refused to accept two debt restructurings that gave investors about 30 cents on the dollar.
“Argentina was never going to negotiate on Elliott’s terms without a negative ruling in hand,” Eduardo Levy-Yeyati, the chief economic adviser of New York-based investment bank ACGM Inc., said in a telephone interview from Buenos Aires. “Now they can say to voters, ‘We did everything legally possible.’”
The dispute revolves around Argentina’s 2001 default on a record $95 billion in debt. The country offered to substitute lower-value bonds in 2005 and made a similar proposal in 2010 that gave creditors about 30 cents on the dollar. Owners tendered about 92 percent of the outstanding debt.
Paris Club
Kicillof, who holds a doctorate in economics from the University of Buenos Aires, brokered a $9.7 billion settlement last month to resolve a dispute with the Paris Club group of creditors dating from the 2001 default. That came months after reaching an accord to compensate Repsol SA for Argentina’s seizure of oil producer YPF SA. (YPF) The announcements helped push bond yields to a two-year low before the Supreme Court ruling.
Argentina calls investors who have refused previous debt exchanges “vultures” because they bought many of the bonds post-default at a discount, angling to eventually collect a windfall. Argentina said it couldn’t afford to pay both sets of bondholders because claims similar to Elliott’s could mount to $15 billion from the $1.3 billion involved in the current ruling.
‘Imminent Risk’
“America’s highest court has spoken,” NML Capital, a unit of Elliott Management, said in an e-mailed statement. “Now it is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”
Lawyers for the defaulted bond holders today filed papers in the Court of Appeals saying that the previous orders “are now in full force and effect” as a result of the Supreme Court’s refusal to hear the case.
Carmine Boccuzzi, a lawyer who represents Argentina, didn’t return a voicemail message seeking comment. The country had said in a May 27 filing that complying would create “a serious and imminent risk of default.”
Argentine stocks tumbled, with American depositary receipts of state oil producer YPF SA plunging 12 percent, while power distributor Empresa Distribuidora y Comercializadora Norte SA ADRs fell 15 percent.
Pari Passu
Notes due 2033 and sold under New York law, which have the interest payment due June 30, fell 7.04 cents on the dollar to 74.66 cents at 5:07 p.m. New York time, according to data compiled by Bloomberg. The extra yield investors demand to own Argentine debt over U.S. Treasuries widened 129 basis points, or 1.29 percentage point, to 866 basis points, the most in emerging markets, according to JPMorgan Chase & Co.
NML had argued that an equal-treatment, or “pari passu,” clause in the bond agreement bars Argentina from treating the restructured securities more favorably than the defaulted bonds.
A federal trial judge agreed with that argument, as did the New York-based 2nd U.S. Circuit Court of Appeals in two rulings.
Argentina urged the Supreme Court to ask New York’s highest court whether that interpretation is correct under state law. The country also contended that the orders violate a federal sovereign-immunity law by dictating what the nation must do with property located outside the U.S.
NML told the Supreme Court that Argentina has the resources to avert a default.
Next Step
Argentina has given mixed signals about its likely next step. In an appeals court hearing last year, the government’s attorneys said the Latin American country wouldn’t “voluntarily” obey the court orders.
In its most recent Supreme Court brief, the country promised to comply with the orders, while saying the likely result would be a new default. Argentina says it lacks the resources to pay holdout claims while also servicing the restructured bonds.
According to a memo leaked to an Argentine website last month, the country’s attorneys recommended a default and immediate restructuring in the event the Supreme Court rejected the appeal.
Argentina’s economy minister last week raised the prospect of negotiating with the holdouts, a step the country has previously rejected.
Settlement discussions might be complicated by a clause in the restructured bond contract. That provision bars Argentina from “voluntarily” offering the holdouts a better deal than the other bondholders receive. The clause expires in December, and some lawyers dispute whether it is binding in Argentina in any event.
The first case denied review today is Argentina v. NML Capital, 13-990. The second case rejected by the court, filed by owners of the restructured bonds, is Exchange Bondholder Group v. NML Capital, 13-991. The high court’s decision requiring the two banks to turn over information was Argentina v. NML Capital Ltd., 12-842.
To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net
To contact the editors responsible for this story: Patrick Oster at poster@bloomberg.net; Brendan Walsh atbwalsh8@bloomberg.net Brendan Walsh, David Papadopoulo
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