Argentina Bond Battle Drags on as Elliott Spurns Macri Offer

  • Prat-Gay predicts funds will make concessions in coming days
  • Aurelius says offers vary widely for different creditors

The 15-year dispute between Argentina and holders of its defaulted bonds is set to drag on after the biggest holdout creditors refused to accept the government’s terms.

Hedge-fund billionaire Paul Singer’s Elliott Management, along with Aurelius Capital Management, Davidson Kempner Capital Management and Bracebridge Capital, declined an offer made public on Feb. 5 that Argentine officials said would pay as much as $6.5 billion on $9 billion of holdout claims. The proposal, which was accepted by two of the six biggest hedge funds suing the country, was more generous than offers made by President Mauricio Macri’s predecessors in two restructurings after the 2001 default.

Argentina will remain locked out of international bond markets as long as the dispute is unresolved, limiting its ability to raise financing overseas and attract foreign investment to its dollar-starved economy. Finance Minister Alfonso Prat-Gay said in a radio interview over the weekend that he expects the remaining holdouts to make some concessions during the next few days, while Aurelius Chairman Mark Brodsky issued a statement signaling that the different terms offered to investors have left the two sides far from a deal.

While Argentina’s offer was “a very promising starting point, it may require additional negotiations down the road,” said Alejo Costa, the head strategist at Puente Hermanos, a Buenos Aires-based brokerage. “At the end of the day, it will depend on Elliott’s and Aurelius’s attitude toward an agreement.”

Court Orders

The hedge funds battling Argentina have put the nation in a bind. A U.S. court ruling means Argentina can’t make payments on notes issued in its two post-default debt swaps until the holdouts are paid in full because of a so-called equal-treatment clause in the bonds. Former President Cristina Fernandez de Kirchner refused to obey the order as it took effect in 2014, triggering the nation’s second default in 13 years.

Macri, who took office in December, has said he’s committed to reaching a fair deal with the holdouts after campaigning on a pledge to reverse his predecessor’s economic policies, which he blamed for stalling growth, inflation of more than 25 percent and a paucity of investment in the country.

The nation’s bonds have rallied in anticipation of a settlement, with benchmark bonds due 2033 reaching a record high of 116.7 cents on the dollar Monday.

Proposals Accepted

The proposal made public Friday was accepted by two funds -- billionaire foam-cup magnate Kenneth Dart’s Dart Management Inc. and Montreux Partners. Talks between the government and representatives of the creditors took place last week at the office of court-appointed mediator Daniel Pollack in New York.

The terms offered by Argentina vary depending on whether the bondholders have an equal-treatment ruling against the government and if they have a court judgment that specifies how much they’re owed. Investors with the ruling who lack a judgment were offered as much as 72.5 percent on their claim, while those with a judgment would be paid 72.5 percent of the amount awarded by the court. Bondholders without an equal-treatment injunction were offered 150 percent of the face value of the bonds they own.

Once a New York court awards a judgment to an investor, the bonds start accruing interest equal to the average for a one-year Treasury note. Bonds that aren’t attached to a judgment accrue interest at a faster rate based on the securities’ original coupon as well as a statutory rate of 9 percent.

Attractive Offer

As a result of the distinction, Argentina’s offer is more attractive for investors such as Dart -- who received a judgment on his $595 million of defaulted bonds in 2003 -- because less of the claim is composed of accrued interest, allowing him to be repaid in full, Aurelius’s Brodsky said in a statement on Sunday.

Dart received a judgment for about $725 million, including interest, and by accepting 150 percent of the principal will be repaid about $890 million. His claim would currently be worth less than that, at about $850 million, according to data compiled by Bloomberg.

“Argentina bought Dart’s support by agreeing to pay its claim in full,” Brodsky said. “Aurelius would gladly accept such generosity, though we have always been willing to take a haircut.”

Kenneth Johns, an attorney for Dart, said in an e-mail that the two parties “were able to reach an agreement in principle settling our substantial unpaid judgment.”

“Argentina’s constructive approach to the negotiations this week, and the very significant settlement offer publicized on Friday, demonstrate the government’s genuine commitment to bringing this long-running dispute to an end,” he added.

Interest Claims

For investors such as Brodsky and Singer, most of their claim on their bonds that don’t have a judgment comes from the interest accrual. Some of the bonds Singer owns accrue interest at an annual rate of more than 100 percent, according to court documents.

Elliott also owns bonds with $1.7 billion in judgments. Stephen Spruiell, a spokesman for Elliott, declined to comment.

Argentina’s proposal offered to pay the creditors in cash raised from issuing bonds abroad, sales that would require them to drop or suspend the lawsuits that prevent the country from accessing international capital markets.

Prat-Gay said that each agreement he reaches will put additional pressure on the remaining holdouts to settle. With enough participation, the judge may be convinced to suspend the ruling against the nation, he said.

“Then, if one fund wants to hold out, they’re going to have a tough time,” Prat-Gay said in a interview on Radio Mitre.

The proposal came days after Argentina announced that it reached an agreement to pay 50,000 Italian bondholders 54 percent of their $2.5 billion claim on defaulted debt in cash. Those creditors also accepted payment of 150 percent of principal.

The Italian accord and the one reached Friday are subject to approval from Argentina’s Congress, which would also need to repeal a law that prevents the country from providing the holdouts with better terms than those the nation offered in restructurings.

Argentina and the remaining holdouts are “working constructively” to resolve their differences and reach an agreement, Pollack wrote in a statement Friday.

Argentina, which borrowed more money internationally than any developing nation in the 1990s, defaulted in late 2001 following a four-year recession. A one-to-one currency peg to the dollar had made local companies lose competitiveness after Brazil, its largest trading partner, devalued its currency in 1999.

“There’s still a long way to go in terms of the additional agreement with the other holdouts, but this is a very positive step towards that,” said Gerardo Rodriguez, a money manager at BlackRock Inc. in New York. “The negotiations haven’t been easy for anybody, so it’s going to take some time.”

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