Gramercy Pushing Investors on Argentina Debt Solution

Gramercy Funds Management LLC, the hedge fund that helped orchestrate Argentina’s defaulted-debt exchange in 2010, is seeking support from bondholders to help end a decade-long legal battle with the government.

The initial proposal by Gramercy, which owned more than $383 million of Argentine debt as of November 2012, calls for holders of restructured bonds to hand over a portion of their interest payments to investors with defaulted securities, according to five bondholders approached by officials from the Greenwich, Connecticut-based firm. Gramercy would then seek to persuade holders of defaulted securities to drop their lawsuits, according to the investors, who asked not to be identified because the talks are private.

Moving toward a resolution would help squelch concern that the legal challenge led by hedge fund Elliott Management Corp. will prompt a new default on Argentina’s overseas bonds. Four of the five investors, all of whom hold restructured debt, said they would be interested in ending the standoff. The fifth said he was reluctant to be involved because the government and New York-based Elliott should settle the matter on their own.

“Is it legally feasible? Possibly,” Anna Gelpern, a law professor at Georgetown University in Washington, said in a telephone interview. “If the plaintiffs agree to it, anything is feasible. For this particular case, for the case of Argentina and the creditors, it looks like a very good thing because it’s in the interest of everyone involved to come to a solution.”

‘Argentina’s Participation’

Steve Bruce, a spokesman for Gramercy, declined to comment on the talks or whether the firm is leading them. Norma Madeo, a spokeswoman for Argentina’s Economy Ministry, declined to comment on whether the government was approached with the plan and whether they would support it.

“We have not been in touch with the exchange bondholders about this, and they have not been in touch with us,” NML Capital Ltd., a unit of Elliott, said in an e-mailed statement. “We have approached Argentina countless times about negotiating a resolution to this dispute. It is completely within Argentina’s power to do this. It is absurd to think that Argentina’s debts can, should, or need to be resolved without Argentina’s participation.”

Litigation with holdout creditors and Argentina’s defiance in complying with court orders to pay them in full have whipsawed government bonds this year, pushing average yields up to as high as 15.3 percent in March. Yields have since declined to 11.6 percent, according to data from JPMorgan Chase & Co.

Default Risk

Argentina defaulted on $95 billion of foreign debt in 2001 and imposed losses of about 70 percent on bondholders who took part in the original exchange in 2005 and the Gramercy-led deal in 2010. Investors including billionaire Paul Singer’s Elliott pursued full payment in court, and on Aug. 23 an appeals court in New York said Argentina can’t make payments on its restructured notes unless it pays holders of defaulted bonds in full.

The country has said it would never voluntarily obey such an order. As the court’s decision prevents third parties, including trustee Bank of New York Mellon Corp., from passing along payments to bondholders, concern payments would be blocked on the restructured notes has pushed the price to protect against an Argentine default with credit-default swaps over five years to 1,710 basis points, or 17.10 percentage points, the highest in the world, according to data compiled by CMA.

The decision won’t be enforced until the U.S. Supreme Court decides whether or not to hear an appeal by Argentina.

Gathering Support

Speculation that the litigation could extend into next year and that investors are working on a solution helped push down bond yields to the lowest in a year on Oct. 21, according to JPMorgan Chase. The extra yield investors demand to hold Argentine debt over U.S. Treasuries fell seven basis points to 889 basis points at 3:36 p.m. in New York.

Gramercy, which has litigated in support of Argentina, will take the proposal to the government and the holdouts if it gets enough backing for the idea from investors, according to a person involved in the talks who asked not to be identified because the discussions are in a preliminary stage. Approval by holders of 75 percent of each series of bonds, or of 85 percent of all $37 billion outstanding of exchange bonds, would be required to change their terms so that a portion of future interest payments can be earmarked to the holdouts, the person said.

The plan would require that the holdouts, who altogether own $6.6 billion in principal of defaulted bonds, enter into a third debt swap. On Sept. 11, Argentina’s Congress gave final approval to reopen the exchange on the same terms as those in 2005 and 2010, for the 7 percent of bonds that weren’t swapped.

‘Never Happened’

Gramercy estimates about 20 percent of interest payments due over the next five years may cover the difference between a negotiated amount for the holdouts and the value of a third debt exchange, according to the person.

“You have to think outside the box because it’s a very unique situation, but in my experience of 20 years covering sovereign debt restructurings, it’s never happened,” Siobhan Morden, the head of Latin American fixed-income at Jefferies Group LLC, said in a telephone interview from New York. “The question is whether the bondholders will accept another haircut so that another bondholder can receive a lot more.”

Vladimir Werning, an economist at JPMorgan in New York, lowered his recommendation on Argentine bonds to marketweight from overweight on Oct. 21, following the rally.

The plan “carries meaningful execution risk at this early stage,” Werning wrote in a note to clients. “A likely extension of litigation horizon and the promise of ‘inter-creditor solutions’ do not justify a complete elimination of litigation risk premia from bond prices.”

‘By Negotiation’

If Gramercy is unable to garner the support needed to amend the bond contracts, investors can find alternative ways to pay the holdouts that don’t require such wide participation, according to Bruce Wolfson, an attorney at Bingham McCutchen LLP in New York.

“Speculation seems to fall to the extremes -- that settlement is either imminent or impossible -- while the truth, in my view, lies somewhere in the middle,” Wolfson, who has been following the litigation and has more than 30 years of experience in emerging-market debt restructurings, said in a telephone interview. “I’m, however, sticking with my long-standing view that this dispute will ultimately be resolved by negotiation, not by the Supreme Court.”

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