Argentina deposited $1 billion to make a June 30 interest payment on restructured bonds, setting up a conflict with a court order that prohibits the nation from paying the notes without also servicing its defaulted debt.
A U.S. judge today denied Argentina’s request to stay the ruling, minutes after Economy Minister Axel Kicillof said making the deposit with bond trustee Bank of New York Mellon Corp. shows Argentina is complying with its obligations. NML Capital Ltd., the plaintiff in the case, asked the judge to hold the country in contempt for plans to pay the restructured debt while appearing to reject orders to pay the defaulted debt. District Court Judge Thomas Griesa called attorneys for the two sides to a hearing tomorrow at 10:30 a.m. in Manhattan.
Argentina’s announcement marks a reversal after officials said just eight days ago that it wouldn’t make the payment. While the government has spent a decade battling holders of debt who didn’t agree to two restructurings after its 2001 default, the issue is coming to a head now after the U.S. Supreme Court on June 16 left intact a ruling that requires the country to pay $1.5 billion to some of the holdout creditors.
“They want to show good will to exchange bondholders, it’s to reassure bondholders that they will pay them,” Siobhan Morden, the head of Latin America strategy at Jefferies Group LLC said in a telephone interview from New York. “They know that at least their money is pledged somewhere.”
President Cristina Fernandez de Kirchner’s government had initially said after the Supreme Court decision that the country planned to skirt the ruling by offering a swap into bonds immune from U.S. laws. Officials later said that they’d seek a negotiated settlement with the holdout creditors, and Kicillof reiterated yesterday that it was seeking fair conditions for talks.
Restructured bonds due 2033 fell 1.56 cent to 85.24 cents on the dollar as of 5:45 p.m. in New York, pushing yields up 0.23 percentage point to 10.26 percent. With the interest payment due at the end of this month, the securities will be in default if a payment isn’t made by the end of a 30-day grace period.
Argentina deposited the equivalent of $832 million for the June 30 debt payments, with $539 million going into the Bank of New York Mellon account at the central bank designated for international bonds. In total, including peso payments, more than $1 billion was set aside to pay the debt.
Ron Gruendl, a spokesman for BNY Mellon, had no immediate comment. The ruling prevents third parties, including the trustee, from transferring payments on the performing bonds unless the holdout creditors are also paid.
Any attempt to block the payment will violate the rights of investors who accepted losses of 70 cents on the dollar in debt restructurings in 2005 and 2010, Kicillof said.
“Complying with a sentence can’t mean we don’t meet existing obligations,” Kicillof said, reading from a statement in Buenos Aires today. “Argentina will meet its obligations, will pay its debt, will honor its promises.”
The deposit “is even stronger evidence that they do not want to default,” Jane Brauer, an emerging-markets strategist at Bank of America Merrill Lynch, said in an interview. “We’ve been saying they can’t do this exchange by the end of the grace period, if at all, and perhaps they’re coming around to the same conclusion.”
Judge Griesa denied the stay sought by the South American nation, which Kicillof had said would aid negotiations. The creditors, led by NML Capital, have said they’re willing to enter into talks with Argentina and would consider working out “a consensual accommodation” to allow Argentina to make its bond payment by the end of its grace period if talks “have made good progress,” according to a letter filed with the court.
The deposited funds are at risk of being claimed by holders of defaulted debt, according to Carlos Abadi, the chief executive officer of New York-based investment bank ACGM Inc.
“It’s going to be devilishly complicated,” Abadi said. “This money is now a sitting duck for a period of time because Bank of New York will not want to be found in contempt of Judge Griesa’s ruling and it opens a window of opportunity to an attachment.”
There are still about $6.6 billion of bonds from the default that weren’t swapped in the restructurings, according to data from the economy ministry. Including unpaid interest, potential claims on the notes may total more than $16.2 billion, according to estimates by Citigroup Inc. That’s more than half of Argentina’s foreign reserves.
To persuade international bond investors to once again lend it money, Argentina must settle with all holdouts, according to Phillip Blackwood, who oversees $3.5 billion of emerging-market assets in London at EM Quest Capital LLP.
In a presentation yesterday at the United Nations, Kicillof said the country is willing to negotiate in good faith. In a press conference afterward, he said he hadn’t met with representatives for the holdouts and wouldn’t before he left New York.
Dan Pollack, the special master charged with overseeing negotiations, said in a statement yesterday that he’d met with lawyers for Argentina and the holdouts in the previous 48 hours without reaching any resolution.