Argentina Loses U.S. Appeal of Defaulted Bonds Case

Argentina lost its appeal of a ruling that would force it to pay in full holders of $1.5 billion in its defaulted bonds when it makes a payment to investors who took discounted restructured debt.

The U.S. Court of Appeals in New York said it would delay the effect of its ruling until the U.S. Supreme Court decides whether to review the case.

A three-judge appeals court panel, referring to the nation as “a uniquely recalcitrant debtor,” rejected Argentina’s arguments that a ruling in favor of the defaulted debt-holders, led by billionaire hedge fund manager Paul Singer’s NML Capital Ltd. and Aurelius Capital Management, would violate its sovereignty and expose it to a fresh financial crisis by threatening a default of the new bonds.

Argentina has vowed never to pay holders of its defaulted bonds, whom the country’s leaders have called “vultures,” and its legislature passed a law in 2005 barring payment of the defaulted bonds. Today’s ruling leaves Argentina with the unlikely prospect of persuading the appeals court to overrule itself or the Supreme Court to consider the case.

“What the consequences predicted by Argentina have in common is that they are speculative, hyperbolic and almost entirely of the republic’s own making,” U.S. Circuit Judge Barrington Parker wrote in today’s opinion.

Deep Discount

Argentina in 2001 defaulted on a record $95 billion of foreign debt. Holders of about 91 percent of the bonds agreed to take new exchange bonds in 2005 and 2010, at a deep discount.

Argentina’s restructured dollar bonds due in 2033 fell 2 cents to 61.72 cents on the dollar at 3 p.m. in New York, according to data compiled by Bloomberg. Yields on the securities fell 0.47 percentage point to 14.69 percent. The extra yield investors demand to own Argentine bonds over U.S. Treasuries rose 0.43 percentage point to 10.66 points, according to JPMorgan Chase & Co. data.

The court today also disagreed with Argentina’s arguments that a ruling against it would hamper future efforts by overwhelmed debtor nations to restructure their debt.

Holders of the defaulted bonds have won U.S. court rulings recognizing their right to be paid. They asked the appeals court to uphold rulings by U.S. District Judge Thomas Griesa in Manhattan that they said give them the ability to collect the $1.5 billion they said they’re owed.

Court Order

Bank of New York Mellon Corp., the indenture trustee for restructured bonds, argued that it shouldn’t be forced to halt payments to holders of those bonds if Argentina refuses to comply with a court order to pay the defaulted bonds. The court today agreed with Griesa’s ruling that Bank of New York and other institutions involved in the restructured bond payments can’t act in concert with Argentina to violate his orders.

“Our decision affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms,” Parker said in his opinion.

Argentina has spent the past decade opposing claims brought in U.S. courts by holders of the defaulted bonds.

A three-judge panel of the U.S. Court of Appeals heard arguments in the case from both sides in February.

The judges on the appeals panel are Rosemary Pooler, appointed by President Bill Clinton, a Democrat; Reena Raggi and Parker, both named to the court by George W. Bush, a Republican.

The case is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (New York).

Before it's here, it's on the Bloomberg Terminal.