Argentina Move Buoys Unpaid Bonds as Holdouts Lose Leverage

  • U.S. judge moved to end injunction that hedge funds sought
  • Benchmark restructured notes rally to fresh record high

Argentina is on the cusp of returning to international capital markets for the first time since its 2001 default as a favorable U.S. court ruling puts pressure on creditors to settle their legal claims against the government.

The country’s restructured bonds rallied to a record and its benchmark stock index jumped the most in four months after a judge agreed Friday to drop orders that barred Argentina from issuing new notes or paying restructured debt, part of a decade-old court battle with hedge funds. The dispute had dragged on growth and left Argentina exposed to creditors’ attempts to seize its assets.

U.S. District Judge Thomas Griesa’s decision means that investors led by billionaire Paul Singer’s Elliott Management Corp. have lost much of the leverage they had to push for better terms in talks over compensation for bonds left over from the $95 billion default. Argentina has already agreed to pay more than $1 billion to other creditors as newly elected President Mauricio Macri makes good on pledges to reach deals that would lure investment and financing to South America’s second-largest economy.

“We expect many more funds to accept the offer now as they are losing much of their bargaining power,” said Jane Brauer, a strategist at Bank of America Corp. in New York. “We’ve been overweight Argentina in anticipation that a settlement might take place in the next four to five months, but this is going faster than we expected. We think the bonds have more room to run.”

Griesa’s decision is contingent on the nation repealing laws that bar paying the holdouts, and on the approval of a federal appeals court. If that happens, the injunctions will be automatically lifted as soon as Argentina pays investors who have settled their claims by Feb. 29. Once the injunctions are removed, Argentina will no longer be blocked from paying those investors who agreed to debt exchanges in 2005 and 2010.

The country’s benchmark bonds due 2033 climbed 0.94 cent to 119 cents on the dollar as of 2:41 p.m. in New York on Monday. The securities had rallied since a first-round presidential vote in October on speculation Macri would take office and reach a deal to end the legal battle. The Merval benchmark stock index jumped 5.7 percent.

Because the previous administration had appealed a question related to the injunctions, leaving Griesa unable to immediately vacate them, Argentina on Monday asked the higher court to dismiss its appeal. The holdouts said they will respond to Argentina’s request.

Daniel Marx, a former Argentine finance secretary and head of consulting firm Quantum Finanzas, said last week that the country will need to issue as much as $20 billion of debt this year to settle with the holdouts and finance a fiscal deficit.

“Argentine bonds can go a bit higher, not necessarily much higher,” said Regis Chatellier, a strategist at Societe Generale SA in London. “The market largely anticipated a positive outcome.” For new bonds, “there should be high demand because carry is still a big decision factor,” he said.

Elliott and the other leading holdouts will probably try to limit Argentina’s access to international bond markets until they’re paid by seeking to seize the nation’s assets in the U.S., Barclays Plc analysts Pilar Tavella and Sebastian Vargas wrote Monday. Those holdouts have the bulk of claims on defaulted debt, and told the court that 86 percent of plaintiffs have yet to see a resolution.

‘Credit Positive’

The nation stopped payments on the securities in 2014 because of the court ruling, which said it couldn’t service that debt without paying the holdout creditors. Argentina owes $3 billion in overdue interest on the restructured bonds, according to Bank of America.

“This is credit positive for the country, which is now just a step away from returning to capital markets,” said Alejo Czerwonko, a New York-based emerging markets strategist at UBS Wealth Management. “The next step will be to get congressional support, which we’re confident won’t be a problem.”

Argentine cabinet chief Marcos Pena said Saturday that the government, provincial governors and lawmakers generally agree that repealing the law is necessary, according to an e-mailed statement. Argentina’s congress reconvenes in March.

Ahead of Griesa’s decision, the holdouts had argued the injunctions should remain in place because dropping them would “upend the negotiations that only now are just beginning in earnest.”

Market Pariah

They also said that Argentina hadn’t spent much time meeting with the bondholders before going public with a settlement offer they called an "ultimatum” that favors some creditors over others. Under the proposal, some bondholders will be repaid 100 percent of their claim, while others will suffer losses of as much as 30 percent. Michael O’Looney, a spokesman for Elliott, declined to comment on the decision.

Michael Spencer, an attorney for a group of smaller investors with more than $832 million of claims on defaulted bonds told the appeals court in a letter Monday that Daniel Pollack, a court-appointed mediator in the case, excluded him from the negotiations earlier this month despite repeated requests to engage in them.

“The district court’s optimism about Argentina’s intentions does not match what has
actually occurred,” wrote Spencer, an attorney at Milberg LLP. “It is hard to escape the conclusion that the district judge is trying to compel the many other holders of defaulted bonds to accept Argentina’s unilateral public offer.”

Argentina has been a pariah in global markets since the 2001 default. Under President Nestor Kirchner and then his wife, Cristina Fernandez de Kirchner, the government took a growing role in the economy and seized private businesses. By the time Fernandez left office in 2015, the country was seeing anemic economic growth amid a shortage of dollars and inflation that exceeded 25 percent.

Macri, a 57-year-old Buenos Aires native, had campaigned on a pledge to quickly reverse much of the Kirchners’ policies and open up the economy to investment.

“This marks an end to a historic era,” Siobhan Morden, the head of Latin American fixed-income strategy at Nomura Holdings Inc., said in a note.

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