Argentina Bondholders Lose Bid to Get State-Court Review

Holders of Argentina’s restructured debt were denied their request for New York state’s highest court to rule on the meaning of a contract provision at the center of litigation over the country’s defaulted bonds.

A federal appeals court in Manhattan yesterday declined a request by the restructured bondholders to ask the state court to rule on the meaning of an equal-treatment clause governing the defaulted bonds under New York law. Such a referral, which was opposed by Elliott Management Corp.’s NML Capital Fund and other holders of the defaulted bonds, might have delayed resolution of the case by months.

Argentina defaulted on a record $95 billion of debt in 2001. The country then offered to let holders of the defaulted bonds trade for new exchange bonds, at a discount of as much as 75 percent. Holders of more than 91 percent of Argentina’s defaulted debt participated in the 2005 and 2010 restructurings.

On Oct. 26, the U.S. court, the Second Circuit Court of Appeals, ruled that Argentina can’t treat holders of its restructured debt more favorably than the so-called holdout creditors, who declined to participate in the two rounds of debt restructuring.

That ruling was based on New York state contract law. Federal courts in the U.S. sometimes look to state appeals courts to determine questions of state law that are to be applied in federal cases.

Request Denied

A group of restructured bondholders called the “Exchange Bondholder Group,” led by Gramercy Funds Management LLC, last month argued that the state’s highest court, the New York Court of Appeals, should be given the chance to consider the equal-treatment question. The federal appeals court yesterday denied the request in a one-sentence order.

“We presented the Second Circuit with an option to seek an advisory opinion from New York courts on a novel issue of state law which the court has declined to pursue,” Sean O’Shea, counsel for the Exchange Bondholder Group, said in a statement yesterday. “However, today’s decision does not impact the core arguments presented by the Exchange Bondholder Group, including the impact of the District Court’s injunction on third parties.”

The federal appeals court, in its October decision, also sent part of the case back to U.S. District Judge Thomas Griesa, who then ordered Argentina to make a $1.3 billion payment into escrow, the amount claimed by the defaulted bondholders, when it makes scheduled payments on its restructured bonds. Griesa barred third parties, including banks, from helping Argentina evade his orders.

Those orders, which have been put on hold while they’re appealed, will be considered by the federal appeals court when it hears arguments on Feb. 27.

Argentina has made all required payments on the exchange bonds while continuing to refuse payment to the holdouts.

The case is NML Capital Ltd. v. Republic of Argentina, 12-105, U.S. Court of Appeals for the Second Circuit (Manhattan).

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