June 20, 2013
Fitch puts Argentina ratings on watch negative
The RWN reflects increased uncertainty about Argentina's ability to service its international securities issued under New York Law on a timely basis using the
US financial system following the recent US Appeals court ruling. On 26 October, the US Court of Appeals for the Second Circuit in New York upheld US District Judge Griesa's ruling that Argentina breached the 'Equal Treatment Provision' of the original New York-based law bonds defaulted in 2001.
The provision states that the payments rank at all times "at least equally with all other present and future unsecured and unsubordinated external indebtedness". The remedy of the ruling orders Argentina to make payments to holdouts at the same time as or prior to its payments to holders of the 2005 and 2010 restructured debt.
In February 2012, the district court also issued an injunction to all parties involved, directly or indirectly in advising upon, preparing, processing or facilitating any payment on the Exchange Bonds prohibiting them from aiding and abetting any violation of the Court order.
The Court of Appeals sent back the case to Judge Griesa for clarification of the payment formula and the legal responsibility assigned to third parties and intermediary banks in the application of the ruling. Once Judge Griesa clarifies these two issues, the case automatically goes back to the Appeals Court, which should consider the merits of the clarification.
The Argentine government has stated that it would appeal to the US Supreme Court, but it is unclear at this stage if the Supreme Court will take up the matter.
Fitch notes that there is some uncertainty about the timeframe of the legal process and when or how it could affect the country's ability to pay NY-law external debt. At present, Fitch understands that the government of Argentina is not legally restrained from making payments on its performing debt under NY law without making payments to the plaintiffs.
However, this could change depending on Judge Griesa's observations and the subsequent considerations by the Appeals Court on these issues. The next coupon payment on the securities is on 1 December 2012.
In addition, there is uncertainty about whether the government would abide by the final ruling of US Courts given the government of Argentina's previous stance of objecting to making payments to holdout investors.
Argentina's 2005 'Lock Law' prohibits the government from re-opening the exchange or from conducting any type of in-court, out-of-court or private settlement with holdouts without prior authorisation from Congress.
Fitch will continue to monitor how this case evolves and to what extent it impedes Argentina's ability to make timely debt service payments on its external market debt issued under New York Law.
A missed payment on debt would constitute a default event and Fitch would move Argentina's foreign currency IDR to 'RD' (Restricted Default) and the bond ratings of the affected securities to 'D' (Default).
On the other hand, a positive resolution that allows Argentina to continue servicing its NY-law external debt without interruption after the Appeals Court's final ruling would lead to the removal of the RWN.