Argentina Nears Market Return as Bond Payment Ban Lifted

  • Ruling signals end to nation's 15-year battle with hedge funds
  • Remaining holdouts can appeal but face uphill court fight

Argentina is on the cusp of returning to the international credit markets after being shut out for 15 years.

A New York judge paved the way for South America’s No. 2 economy to once again borrow money internationally with an order formally ending injunctions that blocked the nation from paying its restructured debt or issuing new bonds. The move follows years of bitter litigation between Argentina and its unpaid debt holders, led by Paul Singer’s Elliott Management.

On Monday, Elliott and three other U.S. hedge funds holding most of the defaulted bonds agreed to a historic $4.65 billion settlement, the largest of $6.2 billion in resolutions reached by Argentina in recent weeks. U.S. District Judge Thomas Griesa’s ruling is delayed for two weeks to give investors a chance to appeal, but any attempt to reverse it may face an uphill battle now that most of the former holdouts are on board.

"Circumstances have changed so significantly as to render the injunctions inequitable and detrimental to the public interest," Griesa said in the ruling.

The ruling frees Argentina to pay holders of its restructured bonds, who are owed more than $3 billion in past-due interest. Those payments have been blocked since July 2014.

Griesa, who has spent the past 15 of his 85 years overseeing litigation tied to Argentina’s record 2001 sovereign debt default, saw events unfold quickly following the election of Mauricio Macri as the country’s president -- an event the judge said “changed everything.”

The judge rejected a request by Elliott and other investors to delay any ruling by 30 days to give additional holdouts more time to negotiate with Argentina and avoid possible appeals. Elliott, Aurelius Capital Management, Bracebridge Capital and Davidson Kempner, the hedge funds that settled Monday, together held about 65 percent of the bonds covered by the injunctions. Argentina has so far settled with 85 percent of those investors.

Wouldn’t Negotiate

The administration of former President Cristina Fernandez de Kirchner refused to negotiate with the nation’s creditors and Argentina frequently defied the orders of U.S. judges that it disagreed with, while using the courts to try to avoid paying bondholders. Kirchner referred to the hedge funds as "vultures" and called Griesa a "senile judge."

Macri’s administration made a public offer to pay as much as $6.5 billion to settle $9 billion in holdout claims. The offer allowed any defaulted bondholder to settle for the original principal of their bonds plus 50 percent. It included additional options for bondholders whose cases were covered by the court injunctions or who held court judgments against Argentina.

On Tuesday, in a speech at the opening of Congress, Macri called for cross-party support to end the dispute.

“We’ve been in default since 2002 and in these months we’ve made the necessary steps to close this stage,” Macri said. “Now it’s up to this Congress to decide if we end this 15-year conflict. I’m confident that responsibility will prevail over rhetoric and that together we’ll build the necessary consensus.”

Drop Injunctions

After a group of investors including billionaire Kenneth Dart’s EM Ltd. and Montreux Partners settled for more than $1 billion last month, Griesa said on Feb. 19 that the injunctions were no longer necessary. A federal appeals court ordered the judge to hold a hearing before issuing a final order. The additional settlements with the Elliott-led group strengthened Argentina’s hand in case any remaining investors seek to appeal.

EM’s lawyer, former U.S. Attorney General Michael Mukasey, urged the judge to drop the bans.

“It’s the injunction itself, not Argentina, that stands in the way of resolving this dispute,” Mukasey said.

Pressured Holdouts

The endgame of the years-long legal fight came quickly. Griesa gave the warring sides just a few days to submit legal briefs and present arguments over the injunctions, which took years of litigation to put in place. Griesa’s speed put pressure on the holdouts to settle and on Argentina to take steps to repeal laws blocking settlements and to devise plans to pay them. 

The injunctions had been the hedge funds’ major source of leverage over Argentina, blocking it from paying on its performing bonds, issued in restructurings in 2005 and 2010, and triggering a new default in 2014, when Kirchner refused to pay or settle with the holdouts.

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

Macri’s administration is seeking approval from Congress for the deal, along with authority to issue $12 billion in new bonds to allow the settlements to go forward. The finance committee of Argentina’s lower house was set to debate the debt bill this week.

Argentina’s benchmark 2033 bonds, which fell into default in July 2014, fell 1.5 cent to 115.26 cents on the dollar on Wednesday, the lowest since Feb. 11. The price includes accrued interest.

Argentina defaulted on a record $95 billion in 2001, disrupting international credit markets and setting up bitter fights with its disappointed creditors. About 92 percent of bondholders agreed to exchange their debt for new bonds, at a discount of about 70 percent, in restructurings in 2005 and 2010.

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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