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November 21, 2014
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Holdouts could reach debt deal next week

JPMorgan and HSBC are two of the banks involved in negotiations with the vulture funds.
Brazil joins international banks said to be closing in on deal for 80 cents on the dollar

International banks including JP Morgan, HSBC and CITI and holdout creditors of Argentine debt could reach an agreement of 80 cents on the dollar for their roughly US$1.66 billion holdings as soon as next week, sources close to the situation told Reuters service IFR yesterday, even though the two sides have so far been unable to agree on a price for the defaulted paper.

Beyond the international banks, Brazilian entities including state-owned Caixa Economica Federal and development bank BNDES are also entering the fray in an effort to stem any economic effects into the region.

JP Morgan, Deutsche Bank and Citigroup, the potential suitors, declined to comment, while HSBC was not immediately available for comment.

After Argentina defaulted on previously restructured debt last week, the holdouts now worry that if a deal is not reached in timely fashion, the other bondholders could accelerate their bonds — potentially leaving the holdouts with nothing to show for a roughly decade-long legal fight to get payment in full from the country on their holdings.

At the same time, the banks that would purchase the debt are looking for assurance that the sovereign would in turn make them whole on the purchased bonds next year, after a contentious so-called Rights Upon Future Offers (RUFO) clause which Argentina says limits its ability to pay the holdouts itself, expires.

But any implied or explicit guarantee of full payment could be construed as a violation of the clause.

Risks on both sides

Banks might have to take it on faith that Argentina won’t engage in any financial engineering with the holdout debt after the RUFO clause expires on December 31.

Holdouts “are petrified that par bondholders would accelerate,” said an investor close to the talks. “That would leave them in a no-win position. But at the same time this is a fund whose mandate is to aggressively litigate and secure close to par on all of its claims.”

The holdouts may have some breathing space. Another person close to the negotiations said that the holdout firms realize that any acceleration has to go through trustees — in this case the Bank of New York Mellon — and would take “a minimum of a month”.

But one of the sources said what appeared to be the strong position of the holdouts, who were backed by the US courts, was weakening.

“What the holdouts are really nervous about is their loss of leverage,” that source said. “The nuclear option of Argentina defaulting has already happened. It’s clear to me that the balance of power has shifted from the holdouts.” But the banks insist they need guarantees.

“The banks have so far received no guarantees from the government that they might get better terms than those offered in the 2005 and 2010 restructurings once the RUFO clause expires,” said an investor. “Such a guarantee would be required by the banks to complete a deal.”

Up front

At 80 cents on the dollar, the banks would be putting up around US$1.32 billion, of which a certain percentage would be held by holdouts. With accrued interest, the total amount Argentina would owe on the holdout bonds would be around US$1.75 billion.

Talks last week with local banks had fallen through right before the country defaulted, according to credit-rating agencies, but there had been discussions around an initial payment of US$200 million, then another US$300 million and US$100 million before the end of the year, one source said, and any deal now could have similar parameters.

Local banks including Banco Macro were deep in negotiations last week to buy the debt from holdouts litigant investors headed by Elliott Management subsidiary NML Capital and fellow hedge fund Aurelius Capital, which is valued at US$1.33 billion par plus accrued interest.

Argentine institutions are thought to have taken a back seat in the talks, however, with international banks likely to be behind any successful deal.

A deal between holdouts and private banks is seen as a way to get around the so-called RUFO clause on restructured bonds that Argentina says is a stumbling block to reaching any resolution directly with the litigants.

The clause requires the sovereign to offer the same terms to exchange bondholders as it does to holdouts. It is thought that any bank that buys the defaulted debt from holdouts will benefit from an upside in secondary prices once the RUFO clause expires at the end of the year.

—Herald with Reuters, DyN, Télam

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