Argentina Loss Brings End of Defaulted Bond Fight Closer

Argentina lost its appeal of a ruling that would force it to pay in full holders of $1.5 billion in its defaulted debt when it makes a payment to investors who took discounted restructured bonds, leaving the unlikely prospect of a Supreme Court appeal as its last hope.

The U.S. Court of Appeals in New York said it would delay the effect of its ruling until the high court decides whether to review the case. Argentina’s restructured bonds fell after the ruling was released.

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 Elliott Management Corp. and Aurelius Capital Management LP, 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. Yesterday’s ruling leaves Argentina with the unlikely prospect of persuading the appeals court to overrule itself or the Supreme Court to consider the case.

Norma Madeo, spokeswoman for Argentina’s Economy Ministry, didn’t return a phone call seeking comment on the ruling.

Glossing Over

“Today’s opinion unfortunately glosses over the inequitable impact of the injunction on the exchange bondholders’ constitutionally protected property rights,” Sean O’Shea, a lawyer for holders of the restructured bonds said yesterday in a statement. “We look forward to the opportunity to present the exchange bondholders’ position to the Supreme Court.”

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.

A group of holdout investors had 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.

In ruling for the holdouts, the court yesterday rejected Argentina’s predictions of economic disaster.

“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 yesterday’s opinion.

Deep Discount

Argentina’s restructured dollar bonds due in 2033 fell 1.64 cents to 59.66 cents on the dollar yesterday in New York after earlier rising to 62.03 cents, according to data compiled by Bloomberg. Yields on the securities climbed 0.41 percentage point to 15.07 percent. The extra yield investors demand to own Argentine bonds over U.S. Treasuries rose 0.49 percentage point to 10.72 points, according to JPMorgan Chase & Co. data.

“I don’t think there’s any good news in this for Argentina,” said Bruce Wolfson, a lawyer with the firm Bingham McCutchen LLP who has been following the litigation. “The court apparently went down the line and affirmed all of Judge Griesa’s rulings.”

Wolfson said the odds are “very long” that the Supreme Court will agree to hear the case.

The court yesterday rejected Argentina’s arguments that a ruling against it would hamper future efforts by overwhelmed debtor nations to restructure their debt. Parker said Griesa was justified in tying payment of the defaulted bonds to the restructured debt payments because Argentina had made clear “its intention to defy any money judgment issued by this court.”

‘Persistent Violation’

Yesterday’s ruling “appropriately condemns Argentina’s persistent violation of its obligations and its extraordinary defiance of the laws of the United States and the orders of U.S. courts,” Theodore Olson, a lawyer for Elliott, said in an e-mailed statement.  “It confirms that Argentina is not above the law.”

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

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

Clinton, Bush

The case was argued before the appeals court in February. The judges on the appeals panel were Rosemary Pooler, appointed by President Bill Clinton, a Democrat; Reena Raggi and Parker, both named to the court by George W. Bush, a Republican.

Many holders of the defaulted Argentina bonds have won U.S. court rulings requiring the country to pay them. Despite those rulings, courts have generally prevented them from moving to seize the country’s assets, citing the Foreign Sovereign Immunities Act.

That law limits the ability of plaintiffs to sue foreign countries in U.S. courts. Argentina has asked the U.S. Supreme Court to review the case based in part on that law.

On Oct. 26, the appeals court upheld a ruling by Griesa that could allow Elliott Management’s NML Capital and other bondholders to collect, indirectly, by blocking the nation from paying the restructured debt without also paying the defaulted bonds.

Equal Treatment

The appeals court in October affirmed Griesa’s ruling that an equal treatment, or pari passu, clause in the original bond agreements prevents Argentina from treating defaulted bondholders less favorably than exchange bondholders. The appellate court upheld an injunction issued by Griesa that barred Argentina from paying the exchange bondholders without also paying holders of defaulted debt.

In the October ruling, the appeals court asked Griesa to explain how his orders affected third parties, including banks and payment intermediaries. It also asked Griesa to clarify the formula that would be applied to calculate payments to the holders of defaulted bonds.

“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 yesterday.

“We believe that the interest -- one widely shared in the financial community -- in maintaining New York’s status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts,” he said.

The case 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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