Argentina Bondholders Keep Faith Seeking Waiver of Clause

Argentine bondholders are keeping the faith that the 13-year legal dispute preventing the government from paying its obligations can still be resolved.

Creditors with at least 7 billion euros ($9.3 billion) of restructured Argentine debt are planning to ask fellow holders this week or next to waive a clause in their bond contracts that the nation says is prolonging the deadlock, according to Christopher Clark, an attorney representing the group. Agreement from 85 percent of creditors is needed to waive the Rights Upon Future Offers, or RUFO, clause that expires on Dec. 31.

“If Argentina wasn’t going to negotiate at all, I think they’d say it, and they haven’t,” Clark, of Latham & Watkins LLP, said by phone from New York. “I don’t think anybody sees RUFO as being helpful in this process, so if we can get rid of it promptly I think that would be helpful.”

Argentine debt has returned an average 8.2 percent this year even as President Cristina Fernandez de Kirchner’s government presided over the nation’s second default in 13 years. Settling the dispute would allow South America’s second-biggest economy to return to international capital markets and shore up reserves that have slipped to $28.8 billion this year.

Claims Trigger

Fernandez has said the so-called RUFO clause prevents the government from voluntarily extending better terms to creditors who shunned earlier restructurings, thereby keeping the nation from complying with the ruling since it could trigger new claims of $120 billion. To continue paying its debt, Argentina sent a bill to Congress last week to pay foreign bondholders locally, a plan U.S. District Judge Thomas Griesa called “illegal.”

The creditor group, which owns more than 40 percent of the approximately $23 billion of notes containing the clause, will start a consent solicitation this week or next that will ask bondholders to vote to waive the RUFO clause. Economy Minister Axel Kicillof said July 30 he would be open to such a proposal from creditors.

The group will only vote on the clause at this time and won’t consider changing other aspects of their bond contracts, said Clark.

Economy Ministry spokeswoman Jesica Rey didn’t return an e-mail seeking comment on plans to waive the RUFO clause.

The nation last month failed to reach agreement with holdout creditors led by Elliott Management Corp. who were awarded full repayment in a ruling, which totals more than $1.5 billion. The inability to strike a deal resulted in the default since a U.S. court blocked a $539 million payment due on overseas bonds.

Elliott rejected two debt restructurings that imposed losses of about 70 percent. Fernandez has said she won’t be “extorted” into offering the holdouts a better deal.

Legal Risks

If Fernandez’s bill passes, bondholders whose payments are currently being blocked as a result of the ruling can collect their cash in an account in Buenos Aires or swap their bonds for new ones under Argentine legislation.

David Martinez, founder of hedge fund Fintech Advisory, told newspaper Pagina/12 in an interview he supports the debt swap and that it would be successful. Many investors are willing to do business under Argentine law, he said. Martinez last year agreed to buy a controlling stake in Telecom Argentina SA.

The debt swap probably won’t be feasible for most investors and financial intermediaries to participate in because of legal risks that include being sued for contempt of court, according to Alejo Czerwonko, a New York-based strategist at UBS Wealth Management’s chief investment office.

Credit Negative

Moody’s Investors Service said today Argentina’s attempt to bypass the U.S. court ruling is “credit negative” for the government, banks and companies, and reflects the country’s “weak institutional framework.”

The debt exchange is “likely to further isolate them from the international financial community,” Gabriel Torres, a senior credit officer at Moody’s in New York, wrote in a report dated today.

Argentina’s restructured bonds have lost 3.7 percent on average since Fernandez unveiled the swap plan Aug. 19. Still, skepticism that the plan will work has limited the losses, UBS’s Czerwonko said.

“The market reacted mildly to the re-routing and swap announcement since it didn’t take it seriously,” Czerwonko said in an e-mailed response to questions. “Investors know implementation is prohibitively difficult. We’ve heard proposals like this in the past, and they all died quiet deaths.”

Investors are still confident that the dispute will be resolved through a settlement between Argentina and the holdouts, once it’s clear the swap plan will fail, said Siobhan Morden, the head of Latin America fixed income strategy at Jefferies Group LLC.

Fernandez will finish her second term at the end of next year, allowing for a change in leadership that may produce more market-friendly policies, she said.

“Some investors are saying they’ll fail and then they’ll have to pay,” Morden said in a telephone interview from New York. “Or maybe it’s that they’ll pay in 2016, whenever the government turns over and finally focuses on this.”

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