Argentina One-Sixth Bond Offer Seen as ‘Thumbing Nose’

Argentina, which defaulted on a record $95 billion in sovereign debt in 2001, proposed giving holders of $1.3 billion of the repudiated bonds about one-sixth of what a U.S. judge has said they’re entitled to receive--a move one analyst called “thumbing its nose at the court.”

The country’s filing of its proposed plan yesterday, one hour before a deadline set by the court weeks ago, paves the way for the U.S. Court of Appeals in New York to rule in a case in which a group of creditors, led by hedge fund Elliott Management Corp.’s NML Capital Ltd., seek to force the South American nation to pay after more than a decade of litigation.

Argentina said it proposes two possibilities for bondholders to exchange their defaulted debt for new bonds. Argentine officials will submit a bill to their nation’s Congress to provide for the plan to be implemented, the government said in a 22-page letter filed in court.

“After taking the full month available to work on its response, Argentina came back last night with a proposal for exactly the same package that it had offered back in 2010,” Joe Kogan, head of emerging-market debt strategy at Scotia Capital Markets, said in a note this morning. Kogan said he expects the country’s bonds to fall tomorrow “upon news of Argentina’s continued intransigence.” He added: “The proposal itself appears intended for local Argentine consumption as the government seeks to reiterate once again that it will not pay holdouts more than what Argentina gave to exchange bondholders.”

Pay Immediately

A decision forcing Argentina to pay defaulted bondholders immediately would expose the nation to $43 billion in additional claims it can’t pay and trigger a new default, the government has said. With yesterday’s proposal, such a ruling by the federal appeals court in New York may come at any time.

In a press conference today in Buenos Aires, Argentine Vice President Amado Boudou said the country won’t issue more debt to repay old debt as part its proposal. Boudou said the lower U.S. court ruling it’s fighting would mean a 1,300% gain in five years for holdouts.

According to Argentina, the payment formula it’s challenging--set by a New York federal judge--would give NML Capital $720 million. That compares with an estimated value of $120.6 million for NML under one of the payment alternatives the nation is proposing, the so-called discount option.

“Argentina’s proposal accounts for past-due amounts to bring the debt current, provides for a fair return going forward, and also gives an upside in the form of annual payments if Argentina’s economy grows,” the country’s lawyers said in its letter. “The proposal fulfills the court’s dual objectives to satisfy the pari passu clause: non-discrimination in payment priority and equal treatment among bondholders.”

New Bonds

In 2005 and 2010, Argentina offered its creditors new bonds, at a deep discount. About 91 percent of bondholders agreed to the debt restructuring, or exchange.

NML and other holdouts have tried to use U.S. courts to enforce their rights under the original bond agreements.

In its letter to the appellate court yesterday, Argentina estimates that NML paid $48.7 million for the bonds in 2008.

“The formula adopted by the district court would cause great harm to the exchange bondholders while giving plaintiffs a return that is exorbitant on its face,” Argentina said.

Argentina’s top leaders previously vowed never to pay the “vulture” investors, many of which bought the distressed bonds in hopes of turning a profit. Argentina’s legislature in 2005 passed a so-called lock law barring payment on the defaulted bonds.

Par Option

Under Argentina’s proposal, a so-called par option, which is intended for small accountholders, would give bondholders new bonds due in 2038 in a nominal face amount equal to the amount of their defaulted debt, plus unpaid interest up to the end of 2001. The par bonds would pay interest that rises from 2.5 percent to 5.25 percent a year over the life of the bonds. They would also receive a one-time cash payment to compensate for interest they would have earned if the bonds had been issued on Dec. 31, 2003, according to the letter.

The holders would receive additional payments when the Argentine gross domestic product growth exceeds about 3 percent a year, the government said in the letter.

The discount option would give bondholders discount bonds due in 2033, less than the defaulted amount, with an 8.28 percent annual rate and an increase in principal over time. They would be compensated for past due interest on those bonds with new bonds due in 2017 that pay 8.75 percent annually, according to the letter.

The holders would also receive GDP-tied payments, according to the proposal.

No Better Terms

“It is our hope that the plaintiffs will finally join the 92% of creditors, accept this fair and equitable offer and put this difficult period to rest,” said Sean O’Shea, a lawyer for the exchange bondholders, in an e-mailed statement.

Argentina said its proposal wouldn’t allow the plaintiffs in the lawsuit to force it to offer payment on better terms than those received by bondholders who agreed to the restructuring.

Eugenio Bruno, an attorney at the Buenos Aires law firm Estudio Garrido, said in an e-mail that Argentina’s proposal is similar to past debt-restructuring offers by the country that have been rejected by NML and the other holdouts.

If the government were to offer a better deal, it would trigger provisions allowing holders of the exchange bonds to take advantage of more favorable terms offered to the holdouts, he said.

Former Governor

Bruno represents Alfonso Prat-Gay, a former governor of Argentina’s central bank, who submitted a brief in the case supporting his country’s effort to overturn the lower U.S. court ruling. Bruno said he also advises exchange bondholders and holdouts who aren’t involved in litigation.

In November, U.S. District Judge Thomas Griesa in Manhattan said Argentina must pay the entire $1.3 billion claimed by the creditors in the lawsuit whenever it made any payment on its restructured debt. The issue was argued before the appeals court on Feb. 27 in Manhattan.

On March 1, the appellate court ordered Argentina to provide a suggested formula for paying the creditors, led by NML Capital, which refused to take the restructured bonds at a deep discount.

Argentina’s lawyer, in the Feb. 27 hearing, “appeared to propose” an alternative to the payment formula devised by Griesa, according to the appeals court. The three-judge panel gave Argentina a final chance to influence its decision.

The judges may ask for a response from the creditors to yesterday’s filing or come to a decision without one.

Court’s Requirements

The appellate judges said Argentina must tell them how and when it proposes to make current its payments on the defaulted bonds and the rate it proposes to pay. The panel also sought assurances that Argentina’s government would take the necessary actions to make the payments.

In a related case, the U.S. Court of Appeals said March 26 that it won’t grant a full-court reconsideration of an earlier ruling. In that decision, a three-judge panel barred Argentina from treating restructured-debt holders more favorably than holders of the repudiated debt.

Joshua Rosner, an analyst at Graham Fisher & Co., said in an e-mailed note this morning that Argentina’s last minute proposal in the current appeal amounted to the South American nation “ignoring (even thumbing its nose at)” the court.

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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