Argentina Debt Injunction to Be Lifted in Blow to Hedge Funds

  • Holdout hedge funds lose powerful tool to force payment
  • Country says it must borrow to settle defaulted-bond claims

Argentina persuaded a U.S. judge to drop court orders barring the country from issuing new bonds or servicing its restructured debt, taking a key step back into the global financial mainstream after a 15-year standoff with creditors.

U.S. District Judge Thomas Griesa Friday agreed to drop the injunctions once Argentina repeals laws barring payment of its defaulted debt and makes full payment to bondholders who settle by Feb. 29. The decision is conditioned on a federal appeals court’s allowing Griesa’s ruling to go forward.

With the ruling, hedge funds including Paul Singer’s Elliott Management and Aurelius Capital Management lose a powerful tool to force payment from Argentina, while the country gains greater leverage in settlement negotiations. The decision represents a vote of confidence in the administration of Argentina’s new president, Mauricio Macri, which has negotiated with holders of defaulted debt and settled more than $1 billion in claims.

“Put simply, President Macri’s election changed everything,” Griesa said. “The Republic has shown a good-faith willingness to negotiate with the holdouts.”

Griesa’s decision follows a reversal in approach from Cristina Fernandez de Kirchner, Argentina’s former president, who left office in December. Kirchner referred to holders of the defaulted debt as “vultures” and called Griesa, the 85-year-old jurist overseeing lawsuits tied to Argentina’s 2001 default, a “senile judge.” Kirchner triggered a new default in 2014 when Argentina was blocked from making payments on its restructured debt after refusing to pay holders of the defaulted debt.

Paying Investors

Once the injunctions are removed, Argentina will no longer be blocked from paying those investors who agreed to debt exchanges in 2005 and 2010.

“Everything is going in the direction” of normalizing Argentina’s international financial situation, the country’s cabinet chief, Marcos Pena, said, according to a government statement e-mailed Saturday. There is a “general understanding” with Argentine provincial governors and legislators to repeal the laws that block reaching an agreement with the holders of defaulted debt.

Spokesmen for Elliott Management and Aurelius Capital Management, the hedge funds leading the litigation, didn’t immediately return phone calls seeking comment. An official in Argentina’s finance ministry said the government won’t be issuing a statement on Griesa’s ruling.

“This is huge news for Argentina. It shows enormous confidence in the new administration,” said Kathryn Rooney Vera, head of research at Bulltick Capital Markets. “Macri truly is equivalent to a ‘new Argentina.’ Resolve holdouts issue, return to markets, stabilize a previously unsustainable economic framework. Macri has kicked off with a bang.”

Argentina on Feb. 5 reached agreements in principal to pay more than $1 billion to settle with billionaire Kenneth Dart’s EM Ltd. and Montreux Partners. The nation also made public an offer to settle with any defaulted bondholder in cash for the bonds’ original principal plus 50 percent. Bondholders whose cases were covered by the injunctions and held court judgments could claim 70 percent of the judgment amount. Bondholders covered by the injunctions but not holding judgments were entitled to 70 percent of the current accrued value of the claims.

Argentina followed Thursday with a $110 million settlement with Capital Markets Financial Services.

The nation has also reached settlements with holders of Euro-denominated bonds and with 50,000 Italian bondholders. Griesa credited Daniel Pollack, the New York lawyer he appointed to coordinate negotiations, with helping reach the agreements.

Losing Power

“We expect many more funds to accept the offer now as they are losing much of their bargaining power,” said Jane Brauer, a strategist at Bank of America Corp. Attention now shifts to Argentina, whose Congress must repeal laws blocking settlement with the holdouts, she said.

In his ruling, Griesa said the changed circumstances mean the injunctions are no longer in the public interest. Lifting them will benefit exchange bondholders, investors that have already settled and the people of Argentina, the judge said. Allowing the injunctions to remain in place might provide an incentive for the remaining holdouts to delay settlement.

“Allowing the Republic to reenter the capital markets will undoubtedly help stimulate its economy and thus benefit its people,” Griesa wrote. “It might even encourage other indebted nations to choose compromise over intransigence.”

Griesa offered no opinion on whether Argentina’s settlement offer is reasonable, but he said he recognized “the Republic’s earnest efforts to negotiate and its striking change in attitude toward settlement” since Macri took office.

Appeal Pending

Because the Kirchner administration had appealed a question related to the injunctions, Griesa said he is unable to immediately vacate the injunctions. The judge said if the appeals court returns the case to him to allow him to do so, the injunctions will be automatically lifted as soon as Argentina repeals the laws and pays the settling investors by Feb. 29.

Henry Weisburg, an attorney at Shearman & Sterling LLP who has followed the bond litigation, said he expects the appeals court to act as soon as early next week.

“This puts huge pressure on those who’ve not yet settled,” he said. “February 29 is now a very critical date. If you sign on March 1, then you don’t have that leverage.”

Argentina roiled international credit markets with its 2001 default on a record $95 billion. The nation has been locked out of international credit markets since then. Argentina exchanged 92 percent of its defaulted bonds for new ones, at a sharp discount, in restructurings in 2005 and 2010.

Griesa ruled that the original bond contracts called for Argentina to treat holders of the defaulted bonds equally with holders of later debt.

The case is NML Capital v. Republic of Argentina, 08-cv-06978, U.S. District Court, Southern District of New York (Manhattan).

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