Argentina Bond Hedge Funds Said to Support Citibank Payment

A group of hedge funds suing Argentina over the country’s defaulted bonds agreed to back Citibank NA’s request to make a $5 million interest payment to other holders of the nation’s debt when it’s due Sept. 30, a person with knowledge of the matter said.

The change in position by the hedge funds, first reported by the Wall Street Journal, may postpone a clash between Argentine law and U.S. District Judge Thomas Griesa, who ordered the payment blocked. Griesa has set a hearing on the issue for today in Manhattan federal court.

Griesa ruled that Argentina can’t make payments on its restructured debt as long as it continues to refuse to pay hedge funds, led by Paul Singer’s Elliott Management Corp., that hold the nation’s defaulted debt. The judge’s orders triggered a default on Argentina’s performing debt when it was blocked from making a $539 million payment on July 30.

Citibank argued last week that Argentina has a “gun to our head,” with the nation threatening criminal and civil sanctions against the bank’s century-old local branch if it doesn’t forward the Sept. 30 payment to bondholders. The bank said Citibank Argentina faced the possible revocation of its banking license and nationalization by the South American nation.

Argentina’s economy minister, Axel Kicillof, said in a radio interview Sept. 22 that Citibank, a unit of New York-based Citigroup Inc., faces “an enormous mess” if it fails to make the payment to holders of $8.4 billion of U.S. dollar-denominated Argentine bonds, issued under local law and payable in that country.

2001 Default

Argentina defaulted on $95 billion of debt in 2001. The nation replaced about 92 percent of the repudiated debt with new bonds, at a discount of about 70 percent, in 2005 and 2010. Individual investors and hedge funds that didn’t agree to take the discounted bonds, including Elliott Management’s NML Capital, sued for full payment in the U.S., the forum selected by Argentina in the original bond agreements.

Griesa ruled that the bond contracts also require it to treat holders of the original bonds equally with those who accepted the exchange bonds. That means Argentina must pay $1.5 billion to the NML-led group when it makes a payment on its performing debt. That decision was upheld by the federal appeals court in New York. The U.S. Supreme Court declined to hear the case in June.

Griesa has also ruled that banks and payment intermediaries can’t aid Argentina in defying his orders by processing payments.

NML Filing

NML and the other holdouts today filed court papers opposing Citibank’s request that Griesa rule the bank isn’t subject to the payment ban or that he suspend his ruling so the Sept. 30 payment can go forward.

Citibank asked Griesa for relief from his order after a federal appeals court in New York last week dismissed an appeal by the bank seeking to overturn it.

Lawyers for the hedge funds plan to tell Griesa in the hearing today that they don’t oppose a delay that would let the payment go forward next week, according to the person with knowledge of the matter, who spoke on condition of anonymity because it isn’t public.

Griesa scheduled a hearing Sept. 29 on NML’s request that he hold Argentina in contempt of court for disobeying his orders.

The case is NML Capital Ltd. v. Republic of Argentina, 08-cv-6978, U.S. District Court, Southern District of New York (Manhattan).

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