Argentina Settlement Surprise Leaves Some Investors in the Cold

  • Government claims settlement doesn't include time-barred bonds
  • Bondholders ask appeals court not to lift debt injunction

Argentina’s historic return to capital markets is facing a new hurdle as holders of as much as $1.5 billion in bonds from its 2001 default say they’ve been unfairly left out of settlement offers.

Some of those investors -- including Fore Research & Management LP and Varde Partners -- teamed with others seeking to keep a judge’s order in place that prevents Argentina from paying its overseas debt, and may end up suing to try to recoup repayment of their bonds. The country is looking to leave behind the 15-year battle and raise funds overseas for the first time in more than a decade to pay creditors it has settled with, including billionaire Paul Singer.

At the heart of the dispute is whether holders of defaulted bonds with maturity dates before 2010 who never sued for repayment can now ride the coattails of those who did, and get their own settlements for 150 cents on the dollar. Argentina says that the statute of limitations has expired on some of the $95 billion of notes it defaulted on 15 years ago, so holders who never sued over them aren’t eligible for any kind of compensation.

“Argentina is being arbitrary and deciding which claims it wants and which claims it doesn’t want, even though the claims are the exact same," said Brian Rosen, a lawyer at Weil, Gotshal & Manges LLC, who represents bondholders including Fore Research & Management. “They are cherry picking. It appears they were trying to show the court, ‘Look we settled with all these people,’ but now they’re changing their mind.”

The nation offered last month to pay some investors 150 percent of the face value of their debt, part of the country’s efforts to resolve outstanding claims from holders of bonds the country defaulted on in 2001. President Mauricio Macri, who took office in December, said ending the debt dispute was necessary to put the country back on the path to growth and attract foreign investment.

After reaching a deal, Argentine officials later said they won’t pay bonds that are past the statute of limitations, according to e-mails cited in court filings. Under New York law, bondholders have six years after the notes’ maturity date to sue before the statute of limitations expires, according to Henry Weisburg, a partner at Shearman & Sterling LLP, who has tracked Argentina’s default case for years.

Investors who bought the bonds on the secondary market are at risk of ending up with nothing, according to Michael Roche, a strategist at Seaport Global Holdings LLC who had recommended untendered bonds to his clients since 2013, but withdrew his coverage of the nation’s defaulted debt after the Argentine government’s move to settle.

“These are folks that got hooked,” Roche said. "They went on a thesis that they would benefit from the efforts of the active litigants in securing a settlement deal or that all outstanding untendered debt would be eligible for an exchange.”

Finance Minister Alfonso Prat-Gay said in a presentation of a debt bill earlier this month that Argentina won’t make blanket offers on bonds that have exceeded the statute of limitations or were prescribed, the term used by so-called civil law countries. He added in a March 11 interview with newspaper Clarin that the government was prepared to face litigation from holders of these bonds. Argentina’s Feb. 5 offer noted that prescribed bonds wouldn’t be accepted, but didn’t specify which bonds fell in that category.

Prices on the notes indicate that traders expect some type of payout. Euro-denominated securities of the type that Argentina says aren’t eligible for the settlement are still fetching about 100 cents on the euro, down from 130 cents immediately after the settlement was announced, according to Exotix USA Inc. The nominal amount of bonds with expired statutes of limitation may be $900 million to $1.5 billion, according to an estimate by Maximiliano Castillo, director of Buenos Aires-based consultancy ACM.

Bondholders including Max Lee, an investment analyst who made a declaration on behalf of Honero Fund I LLC, a unit of Fore Research & Management, said in court filings last month that Argentina agreed via e-mail to pay on their defaulted bonds but then later reneged, citing issues with the statute of limitations. He is among bondholders asking the appeals court to keep an injunction in place that blocks Argentina from paying overseas debt because the nation is failing to honor its commitment to holders of defaulted bonds.

Attorneys for Red Pines LLC, a unit of Varde Partners, say the investor entered into a settlement agreement with Argentina that was later cited by the nation as evidence of its progress with creditors, and reason to lift the injunction. Yet after the court agreed to do so -- the decision that’s currently under appeal -- Argentina changed its stance, Sabin Willett, a partner at Morgan, Lewis & Bockius LLP, said in an emergency motion filed last week. The government said in a March 21 filing that Red Pines was “mistakenly” submitted to the court in its list of settlements reached with creditors.

The dispute is likely to fuel a new round of lawsuits against Argentina, according to Diego Ferro, the co-chief investment officer at Greylock Capital Management, which holds some of the defaulted debt at stake. Assuming the injunction is lifted, these new disputes could cost Argentina when it undertakes an estimated $12 billion issuance next month as potential buyers will likely account for the increased risk of litigation, Ferro said.

In a brief to the appeals court on Tuesday, Argentine officials said that the country had reached settlements for the majority of outstanding claims.

Argentina can’t make payments that its lawyers have deemed unnecessary, the ministry said in an e-mail response to questions from Bloomberg.

The bondholders that Argentina says are ineligible for the settlement might be able to argue that the statute of limitations on their debt was reset in 2010, when Argentina reopened its previous debt swap for defaulted notes, according to Roche and Weisburg.

“This administration is supposed to be the darling of emerging markets, but it doesn’t feel like a good-hearted attempt to fix the problem,” Ferro said.

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