January 20, 2018
Thursday, June 19, 2014

Gov’t: June 30 debt service impossible

Carmine Boccuzzi, the lawyer for Argentina appears at a hearing before US District Judge Thomas Griesa in Manhattan yesterday.

Economy Ministry warns country may not be able to service debt on June 30

Argentina will not be able to meet its June 30 debt payment if the lifting of the stay that had shielded the country from simultaneously having to pay holdout bondholder — or “vulture” funds as government officials often call them — is not reversed, the Economy Ministry stated late last night.

The ministry warned of the possible outcome to move by US judges after a day of high stakes-legal talk in US District Judge Thomas Griesa’s courtroom in New York, also attended by the holdout plaintiffs, where a lawyer for the country said Argentine officials will seek to negotiate for the first time next week with hedge funds that refused to take part in its debt restructuring.

Lifting the stay means Griesa’s order that Argentina pay all the bondholders at the same time, including the US$1.33 billion to the holdouts, is now in effect.

Lifting the stay “prevents Argentina from carrying out debt coupon payments to fulfill obligations to restructured creditors unless it simultaneously pays the totality of what is demanded by vulture funds (which could be as high as US$15 billion),” the ministry said.

Lifting the stay “makes a payment in New York impossible ... and shows the inexistence of a willingness to negotiate.”

At the same time, the ministry highlighted that “Argentina reiterates its willingness to pay its restructured creditors.”

The meeting came after the 2nd US Circuit Court of Appeals in New York formally lifted the stay it had placed on Griesa’s injunction that bars payment to exchange bondholders via the US banking system unless holdouts are paid at the same time.

“I’ve been informed by Argentina that the authorities will be in New York next week and want to negotiate with the holdouts,” said Carmine Boccuzzi of Cleary Gottlieb Steen & Hamilton at a hearing before US District Judge Thomas Griesa in Manhattan.

Griesa had ordered Argentina to pay the holdout funds US$1.33 billion, which has since increased to US$1.5 billion with interest, at the same time it pays bondholders who participated in the 2005 and 2010 restructurings of the country’s US$100 billion of bonds. The restructured bond holders are due a payment on June 30. If the payment isn’t made, Argentina would enter a technical default on the restructured debt.

Any meeting between the hedge funds and Argentine officials would be their first and could herald the beginning of the end of one of the longest-running sovereign debt crises in recent memory. It has kept the country from accessing international capital markets since defaulting on US$100 billion in debt in 2001-2002.

The news follows a Tuesday speech in Buenos Aires by Economy Minister Axel Kicillof, who said Argentina is taking steps so it can continue paying the vast majority of bondholders who agreed to a debt restructuring in the last several years — without paying the holdouts. Yet Boccuzzi played down that possibility in yesterday’s hearing in New York, saying the issue was only being studied.

The holdout investors are led by NML Capital Ltd., a division of billionaire Paul Singer’s Elliott Management, and Mark Brodsky’s Aurelius Capital Management.

“Notwithstanding the high uncertainty remaining, the government’s open recognition that discussions with Judge Griesa are becoming a critical element for a permanent solution could be a welcome development,” wrote credit analysts at Deutsche Bank, before the hearing began.

The meeting

A lawyer for NML asked the judge to order Argentina not to follow through with Kicillof’s plan, which would involve paying the restructured bondholders through Argentine law.

“We have been prepared to negotiate with Argentina since this matter began,” said Robert Cohen of the law firm Dechert. “We need an order, your honour, that makes it impossible, or as impossible as we can make it, to do the plan they have announced.”

Griesa agreed, and said he would enter an order finding that the finance minister’s proposal violates his orders.

“The mechanism of the sort proposed by the Finance Minister would be a violation of the procedures and orders of the court,” Griesa said yesterday.

President Cristina Fernández de Kirchner has labelled the holdout investors “vultures” for picking over the carcass of the broken economy in the wake of the 2001-2002 default. In a televised address to the nation on Tuesday she said the country was the victim of “extortion” by the holdouts, but that she was still open to negotiations and insisted she would continue to pay the more than 90 percent of creditors who accepted the restructuring terms in 2005 and 2010.

Griesa criticized the president’s use of the word “extortion” in her speech.

“That really does not give me confidence in a good faith commitment to pay all the obligations of the republic,” Griesa said in court. “The president’s speech is a problem.”

Boccuzzi played down the president’s remark.

“She was not saying on June 30 let’s open a cash window someplace outside the court’s jurisdiction and pay these folks,” he said.

Swap proposal

Plans announced by Kicillof to change the jurisdiction of restructured debt was seen more as a way of showing such willingness rather being a viable solution. That’s because participation rates on any such exchange are likely to be low as many investors would be reluctant to be seen skirting an earlier ruling by Judge Griesa, according to market analysts.

“We don’t own any New York-law bonds at the moment, but if we did, we would have to see exactly what the structure of the swap proposal would be and run it though our lawyers to make sure we are not violating the injunction,” said a New York-based investor.

Lawyers echo such sentiment. “It is hard for me to imagine that any of the parties involved would risk a contempt citation by assisting Argentina in evading Judge Griesa’s order,” said Antonia Stolper, head of the Latin America practice at law firm Shearman & Sterling.

Should the government carry out its plans to launch an exchange of New York law bonds for instrument with a local jurisdiction investors will be faced by a stark choice. Either accept an instrument without the protection of US court, but get paid. Or keep a bond and be defaulted on once again.

Some on the buyside see the swap proposals as little more than a negotiating tool to demonstrate that it has other options, however weak.

“No one would do that exchange,” said an investor involved in Argentine debt. “Argentina wants to negotiate and show it has a carrot and a stick, but it is a very small stick.”

While most legal experts think that Argentina can get around a RUFO clause that prohibits it from offering different terms to the holdouts, the idea that litigant investors and the government can meet half way and solve the decades old legal battle is still being met with much skepticism.

“Both sides have really dug in their heels,” said Peter Lannigan, head of EM strategy at CRT Capital Group. “It is going to be challenging for them to avoid default.”

—Herald with Reuters, AP

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