Argentina’s Griesa-Proof Bondholders Unfazed by Sale Halt

Since a U.S. court blocked Argentina from paying overseas bondholders last year, investors in its locally issued debt have been secure in the notion that the ban doesn’t apply to them.

That confidence is proving largely unshakable even after Argentina’s attempt to sell at least $2 billion of the dollar-denominated notes through JPMorgan Chase & Co. and Deutsche Bank AG was upended last week, when U.S. District Judge Thomas Griesa cited the banks for failing to comply with subpoenas.

The securities are holding at an eight-year high as Citigroup Inc. seeks Griesa’s permission to process Argentina’s payments to holders on March 31, saying his order applies only to “external indebtedness” and the local bonds don’t qualify. If Griesa accepts the argument, it may give the cash-strapped nation a way to keep financing itself in dollars. Argentina’s dispute with disgruntled creditors from its 2001 default has prevented the nation from tapping international debt markets.

“The market remains optimistic,” Joaquin Almeyra, a Miami-based fixed-income trader at Bulltick Capital Markets, said in an e-mail. “The judge would make a lot of enemies. It’d go too far.”

Argentine bonds governed by local law and maturing in 2038 have rallied to about 60 cents on the dollar, the highest levels since about 2007, according to New York-based brokerage Torino Capital LLC’s Jorge Piedrahita.

The peso weakened 0.1 percent to 8.7483 per dollar at 12:21 p.m. in New York.

Second Default

The dispute stems from Argentina’s $95 billion default in 2001, which imposed losses of 70 percent on creditors who received new bonds in 2005 and 2010 restructurings. Billionaire Paul Singer’s hedge fund firm Elliott Management rejected the terms of the exchanges and instead sued for full payment. In June, the U.S. Supreme Court left intact Griesa’s ruling that the holdouts must be paid before Argentina can resume payments on its restructured bonds.

The order triggered another default on the nation’s international bonds in July, when President Cristina Fernandez de Kirchner refused to comply with the ruling. While she deposited the funds for payment, the ruling barred financial intermediaries from passing payments along to creditors.

Griesa allowed Citigroup’s Citibank unit to process payments on the Argentine law bonds in June, September and December while the holdouts and the banks submitted arguments on whether the securities should be affected by his ruling.

‘Displayed Receptiveness’

On Tuesday, Karen Wagner, a lawyer for Citibank, told Griesa at a hearing in New York that blocking the payment would force the bank to violate Argentine law and threaten its ability to do business in the country.

Unlike bonds issued under overseas law, the local securities were swapped in the restructuring for defaulted Argentine-law dollar bonds that had been converted into pesos. They were issued by executive decree instead of an indenture and are paid through Argentine institutions, Wagner said.

Carmine Boccuzzi, a lawyer for Argentina, supported the bank’s arguments.

Griesa didn’t immediately rule.

“The Judge has repeatedly displayed receptiveness to arguments from financial intermediaries like Citibank who are cooperating with the court but who could suffer unfair damage from carrying out the injunctions in other jurisdictions where they are regulated,” Vladimir Werning, an economist at JPMorgan, said in a March 3 report.

Edward Friedman, an attorney for Aurelius Capital Management, another holdout hedge-fund creditor, said at the hearing that because the local-law securities were issued as part of the debt swaps in 2005 and 2010 offered globally, the notes constitute “external indebtedness.”

‘International Scofflaw’

The hearing came less than a week after the decision by JPMorgan and Deutsche Bank to stop soliciting bids on local debt securities on Feb. 26, said three people familiar with the matter, who asked not to be identified because the plans were private. Griesa, who ordered the banks to produce documents about plans to sell the bonds to non-U.S. investors, was responding to a request from Elliott.

“We are dismayed that JPMorgan and Deutsche Bank are participating in the schemes of an international scofflaw, schemes which we believe are an attempt to evade the court-ordered enforcement of bondholders’ rights,” Elliott’s NML unit, said on Feb. 25 in an e-mailed statement.

While the litigation has prevented Argentina from selling bonds abroad in the past 13 years, the nation has tapped the local-law dollar bond market, where it has more than $20 billion in debt beyond what was issued in the restructurings.

Argentina would likely be able to sell local-law debt if it avoids using an international bank, according to Greylock Capital Management’s Diego Ferro.

“The issue here has been the banks, not Argentina,” he said in an e-mail. “The judge can’t prevent Argentina from selling a bond under Argentine law through an open auction, and I doubt Elliott would have much ground to complain.”