Soros’s Argentina Bond Win Triggers Irrational Exuberance

A modest win for hedge-fund billionaire George Soros and Hayman Capital Management founder Kyle Bass in London court is triggering a reaction verging on euphoria in Argentina’s bond market.

Bank of America Corp. and Citigroup Inc. say investors need to curb their enthusiasm. On Feb. 13, the presiding judge confirmed the U.K. has jurisdiction over 225 million euros ($257 million) of interest payments frozen by a U.S. court order and intended for holders of euro-denominated bonds, which include Soros’s Quantum Partners and Bass’s Hayman.

The ruling has sent the securities to an eight-year high on speculation the holders, who have been hamstrung since Argentina’s default in July, will finally get paid. The optimism is misplaced as the London judge failed to compel the bond trustee to disburse the money, signaling the U.S. order will remain in force, according to Bank of America.

“It’s mispriced,” Jane Brauer, the bank’s New York-based strategist, said by telephone. “The judge said that the trust in which the bonds are held is under U.K. law, but he didn’t make any ruling about what that means.”

Brauer’s view is supported by Blank Rome LLP attorney Rick Antonoff and Georgetown University law professor Anna Gelpern, who say the decision will have little immediate impact.

Griesa Order

Judge David Richards said that trustee Bank of New York Mellon Corp. or euro bondholders can submit his decision to U.S. District Judge Thomas Griesa, whose orders have blocked Argentina from honoring notes it issued as part of restructurings following its 2001 default.

The nation is barred from making payments until creditors who rejected those deals, led by billionaire Paul Singer’s Elliott Management Corp., are paid in full.

Argentina has refused to comply with the ruling. In June, it deposited the money to pay the euro bonds in BNY Mellon’s account at the central bank. Griesa’s ruling prohibits BNY Mellon from moving the cash offshore.

Soros’s bondholder group sued BNY Mellon in August, claiming Griesa’s ruling shouldn’t apply to notes governed by laws outside of the U.S. and that the bank failed its fiduciary duties by keeping the money from creditors.

The group, which also includes Richard Perry’s RGY Investments and Thomas Wagner’s Knighthead Capital Management, owns 1.3 billion euros of debt.

Richards’s decision has also given investors a claim to the frozen cash, according to Christopher Clark, an attorney for the group at Latham & Watkins LLP.

‘Legal Rights’

“We clearly have legal rights to the money, and the judgment gives us authority to try to claim the money,” Clark said by telephone from New York. “We will continue to pursue our clarified ownership rights in all appropriate venues across the world.”

Argentina’s bonds due in 2033 have soared 4.6 euro cents since the ruling to 92.3 as of 1:24 p.m. in New York, compared with an increase of 3.3 cents for Argentina’s dollar-denominated debt. Bank of America’s Brauer is telling investors to swap the euro notes for dollar bonds because the rally will falter.

“The court does not provide here for a way for that money to reach the bondholders,” Guillermo Mondino, the head of emerging-market strategy at Citigroup, said in a Feb. 13 report. “Our reading of the ruling suggests that it does not bring good news.”

Risking ‘Contempt’

While Richards’s order may prompt Clark’s group to request in Argentine court that the funds be handed over, transferring the money to an overseas account without violating Griesa’s injunction will be difficult, said Antonoff, partner at Blank Rome LLP in New York.

“The bondholders are arguing that their claim to the money is better than the trustee’s claim to the money because they’re actually creditors of the Republic entitled to be paid,” he said by telephone. “Maybe they can win that argument in Argentina, but if distributing that money requires the assistance of any entities that are subject to U.S. court jurisdiction, those entities would be vulnerable to contempt.”

Gelpern, who is also a fellow at the Peterson Institute for International Economics, doubts the ruling will have much practical benefit for bondholders.

“It is a very mild plus for the Euros, but the English courts’ attitude is indicative –- they will go out of their way to avoid head-on conflict,” she said in an e-mail. “They are slicing the issue just thin enough to say, ‘Hey, there is English law going on over here!’ without changing the outcome.”

(Corrects Kyle Bass’s title in first paragraph of story originally published Feb. 19 in New York.)
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