An Argentina delegation that came today to New York to hold talks with Special Master Daniel Pollock, a court-appointed mediator in the country’s ongoing legal battle with certain holdout creditors, headed back home after a meeting that lasted just about an hour and achieved nothing.
See more on this topic from Elliott’s letter to investors here.
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Argentina is required to make debt repayments worth $ 1.3 billion to ‘holdout’ creditors led by NML Capital, an associate of Paul Singer run Elliott Management, and interest payments of $ 539 million to ‘exchanged’ creditors by a deadline of July 30 failing which it would be considered to be in default.
Holdout creditors in the judicial driver’s seat
The ‘holdout’ creditors refuse to participate in the country’s 2001 debt restructuring, and have been embroiled in a legal battle with Argentina demanding full payment on their bond holdings. Save these creditors, Argentina was able to achieve restructuring agreement with over 92% of its creditors through agreements in 2005 and 2010 (now referred as the ‘exchanged’ creditors).
The holdout creditors were able to achieve notable success on their lawsuits through the American judicial system, and rulings by Judge Griesa of the Second Circuit Court make it binding on Argentina to repay their dues in full before paying the exchanged creditors.
Argentina’s government may have decided to default
Considering the country recently restructured nearly $16 billion worth of claims by Repsol SA (ADR) (OTCMKTS:REPYY) (BME:REP) and the Paris club of creditors by issuing new bonds or restructuring payments, it should be relatively easy for Argentina to settle the holdout claims of $1.3 billion. But it appears the bitter legal wrangling over the past 12 years has taken its toll, and Argentina’s Kirchner administration, which has gone to town painting the holdout creditors as ‘vulture funds’ that swooped to purchase bonds at crisis lows and are now seeking to make good on their investments, is determined to default rather than negotiate.
RUFO clause an impediment
Argentina’s stated difficulty in settling the holdout creditors’ claims is a clause in its contracts with the exchanged creditors, the Rights Upon Future Offers (RUFO) clause, that makes it binding on it to pay every exchanged bondholder whatever it agrees to pay to the holdout creditors. Argentina claims this would swell its liability to over $15 billion, an amount it simply can’t afford.
Strategically expedient to default?
With the return of the Argentinian team the possibility of a negotiated agreement with the holdout creditors before the Wednesday deadline is receding, and the only way another default could be avoided would be, ironically, through the good offices of the holdout creditors who could request judge Griesa to put a hold on his ruling, according to IHS Country Risk Latin America Analyst Carlos Caicedo, cited by CNBC.
According to Caicedo, Argentina might prefer default for now, and renegotiate later, rather than pay off the holdout creditors and risk huge claims from the exchanged creditors demanding pari passu treatment.
In this context it should be noted that the risk of default emanates from payments due on the exchanged liabilities, which Argentina has been regularly paying after the restructuring agreements. Moreover, the country has, in any case, been out of the international capital markets for the past decade or so, and a default at this juncture will be unlikely to affect its ability to tap these markets.
In one interesting viewpoint, Sebastian Soler, a lawyer specialised in financial law said that since Argentina had already transferred the money due to the exchanged creditors to the Bank of New York for making the payout, “Argentina has paid so it would be technically incorrect to say the country will default on Wednesday.”
It is not known whether this argument holds water.