Argentina Loses Bid for Full-Court Rehearing on Bonds

Argentina’s request that the full federal appeals court in New York reconsider a ruling by a three-judge panel was denied in a case involving $1.3 billion in defaulted bonds.

The U.S. Court of Appeals in Manhattan today said the full court won’t rehear the appeal, leaving in place an Oct. 26 ruling that bars Argentina from treating restructured-debt holders more favorably than holders of the repudiated debt. The court is separately considering a related appeal, argued last month, about the details of how a lower court may enforce the October ruling.

Argentine dollar bonds due in 2033 dropped 1.16 cents to 54.8 cents on the dollar at 2:10 p.m. in New York. That’s the lowest intraday price since Nov. 29, according to data compiled by Bloomberg.

Argentina defaulted on a record $95 billion in debt in 2001. Holders of about 91 percent of the bonds agreed to take new exchange bonds in 2005 and 2010, at a deep discount. The country claims that a ruling forcing it to pay creditors who hold defaulted bonds, led by Elliott Management Corp.’s NML Capital Ltd., would open it up to more than $43 billion in additional claims it can’t pay and trigger a new default.

Default Protection

The cost to protect against an Argentine default in the next five years surged 374 basis points, or 3.74 percentage points, to 3,498 basis points, the highest since March 1. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

In October, the appeals court affirmed a decision by U.S. District Judge Thomas Griesa that an equal-treatment, or pari passu, clause in the original bond agreements prevents Argentina from treating holders of defaulted bonds less favorably than the holders of the restructured bonds. The appeals court also said Griesa may bar Argentina from paying on the restructured debt without also making payments on the defaulted bonds.

On Feb. 27 the three-judge panel denied Argentina’s request to rehear the appeal. In a related appeals court argument in the case the same day, a lawyer for Argentina told the same three judges that the nation will default on the restructured debt if it’s forced to also pay holders of the defaulted bonds.

State Law

Because the pari passu ruling is based on New York State contract law, it’s unlikely the issue will be considered by the U.S. Supreme Court, the highest federal appeals court.

The parties argued on Feb. 27 over Griesa’s formula for paying the defaulted bonds and whether his order will apply to third parties, including Bank of New York Mellon Corp., the indenture trustee for the restructured bonds. The court hasn’t said when it will rule.

The appeals court on March 1 directed Argentina to provide a suggested formula for paying the holders of defaulted bonds. The court said Argentina’s lawyer, in the Feb. 27 oral argument, “appeared to propose” an alternative to the formula devised by Griesa.

In November, Griesa said Argentina must pay the entire $1.3 billion claimed by the defaulted-bond holders whenever it makes any payment on its restructured debt.

Full-court rehearings are granted by the New York-based appeals court in only about 0.03 percent of cases from 2000 to 2010, according to a 2011 study by the Federal Bar Council.

The lower court case is NML Capital Ltd. v. Republic of Argentina, 08-06978, U.S. District Court, Southern District of New York (Manhattan). The appeal is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (New York).

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