Argentina Caught in Bond Limbo as $539 Million Held Up by Griesa

Jul 22, 2014 8:25 am ET

July 22 (Bloomberg) -- Three weeks after President Cristina Fernandez de Kirchner sent $539 million to pay bondholders, the money remains in limbo as a U.S. court considers what to do with the funds.

U.S. District Court Judge Thomas Griesa in Manhattan may rule today on whether custody banks can route payments to holders of bonds issued under European and Japanese law. He may also clarify what Bank of New York Mellon Corp. should do with money it was banned from disbursing to holders of securities under New York jurisdiction. Argentina’s dollar-denominated bonds due in 2033 fell 1.5 cent to 88.1 cents yesterday, the lowest in two weeks, while euro bonds due in 2033 dropped to 84.25 euros. Emerging-market debt fell 0.1 percent on average, according to JPMorgan Chase & Co.

Time is running out for Argentina to reach a settlement with holdout creditors from the nation’s 2001 default before a grace period on the bond payment expires at month’s end. Griesa, who blocked payments deposited with BNY Mellon because Argentina didn’t also set aside $1.5 billion it was ordered to pay the holdouts, is unlikely to let the funds clear, said Joshua Rosner, managing director and bank analyst at Graham Fisher & Co.

“In terms of releasing the exchange bondholders’ funds, I expect the judge will say no unless the holdouts and the government agree, and I can’t imagine that the holdouts will agree,” Rosner said in a telephone interview. “At this point this is a subterfuge. We have yet to see the government really suggesting a willingness to settle.”

‘Can’t Default’

The U.S. Supreme Court on June 16 left intact lower-court orders that the South American nation must pay holdouts including Elliott Management Corp. if it makes payments on restructured bonds.

The case stems from Argentina’s record $95 billion default. While 92 percent of creditors agreed to accept a 70 percent loss, some investors sued for better terms. Argentina will default on the 2033 bonds if it doesn’t reach a settlement with holdouts or is granted a delay by July 30.

Fernandez said on July 16 the country can’t default because it sent the funds to the banks, and now it’s the responsibility of bondholders to demand payment from the judge and intermediary banks.

“Only countries that stop paying their debt fall into default,” Fernandez said at a conference in Brazil. “Argentina will keep paying its debt and meeting its obligations.”

RUFO Clause

Argentina asked the court to delay the ruling so it can continue paying its debt while negotiating with holdouts and to avoid triggering a Rights Upon Future Offers clause, or RUFO. Such a stipulation prohibits the nation from giving other creditors a better offer.

Investors in Argentina’s restructured debt asked Griesa to allow intermediaries to identify exchange bondholders so Argentina can ask them to waive the RUFO.

Elliott, run by billionaire Paul Singer, has said it would support a way for Argentina to keep paying restructured notes if there are concrete steps toward a solution by the end of the grace period. Argentina says it’ll only negotiate if granted a new stay.

Euro Bonds

Still, Griesa may allow banks to make payments on non-U.S. law bonds since they don’t fall under his jurisdiction, according to Eduardo Levy Yeyati, director of Buenos Aires-based research firm Elypsis.

“Griesa will probably authorize payments to bonds that aren’t New York law, reducing the default-able universe,” Levy Yeyati said in a telephone interview from Buenos Aires. “The spread between euro and dollar bonds should widen, as euro bond prices rise after confirmation they’re excluded from the ruling.”

There’s only a three basis point yield spread between euro and dollar bonds due 2033, implying investors don’t see an advantage to owning euro bonds. The notes are yielding 10 percent.

‘Difficult Position’

Argentina won’t send any government officials to attend the hearing and will be represented by U.S.-based attorneys at Cleary Gottlieb Steen & Hamilton LLP, said an economy ministry official who isn’t authorized to speak publicly on the matter.

Richard Samp, the chief counsel of the Washington Legal Foundation, which filed a brief in support of holdout hedge fund NML, said if the custody banks forward the money to exchange bondholders they could be held in contempt of court, and if they don’t, exchange bondholders may sue.

The banks are “essentially asking Judge Griesa to solve the dilemma for them,” Samp said.