UPDATE 2-Argentina asks U.S. Supreme Court to hear bonds case

Tue Feb 18, 2014 8:57pm EST

By Lawrence Hurley and Kevin Gray

WASHINGTON/BUENOS AIRES Feb 18 (Reuters) - Argentina filed an appeal to the U.S. Supreme Court on Tuesday seeking to reverse lower court decisions ordering the country to pay $1.33 billion to hedge fund creditors in a case Argentine officials warn could force it to default on its sovereign debt.

The appeal followed a Nov. 18 decision by the 2nd U.S. Circuit Court of Appeals in New York denying Argentina's petition for a rehearing in a decade-long legal battle with bondholders who refused to accept the country's two debt-restructuring offers after the country defaulted on $100 billion in 2002.

The litigation has heightened investor concerns about a potential debt crisis in South America's second-largest economy, which is reeling from a 17 percent currency devaluation last month that sent shudders through global markets.

The Argentine government said through its embassy in Washington the lower court orders "threaten the well-being of Argentina and its citizens, as well as of the countless holders of performing Argentine debt, many of whom are U.S. institutional investors and individuals."

Argentina is seeking to reverse the rulings that say the country must make full payment to the "holdout" creditors led by hedge funds Aurelius Capital Management and NML Capital Ltd, a unit of billionaire Paul Singer's Elliott Management Corp.

Argentina argues the funds bought the debt at a deep discount after the default and sought to thwart the country's efforts to restructure its debt in which it paid its creditors less than full value of the bonds.

Creditors holding about 93 percent of Argentina's bonds agreed to participate in the two debt swaps in 2005 and 2010, accepting between 25 and 29 cents on the dollar.

The case is being closely watched because of its potential impact on future sovereign debt restructurings.

"Argentina's arguments for prolonging this dispute are without merit and entirely unnecessary," Jay Newman, a senior portfolio manager at Elliott, said in a statement. "As we have stated many times, if Argentina were willing to talk to its creditors, this dispute could be resolved quickly."

In their rulings, the lower courts said Argentina must pay the bondholders who refused to participate in the debt restructuring along with those who did.

SOVEREIGN IMMUNITY

Lawyers for Argentina argue the rulings violate sovereign immunity granted under U.S. federal law by dictating to a country who they should make payments to.

Argentine President Cristina Fernandez has said her government will continue to pay creditors holding the country's restructured debt, but will never pay the holdout bondholders whom she has called "vultures."

Argentina's continued refusal to pay could result in U.S. courts enforcing injunctions blocking payment overseas to bondholders who participated in prior restructurings, possibly causing a new default.

In its appeal to the Supreme Court, Argentina suggested the high court ask the New York Court of Appeals to weigh in on a question of how to interpret state law, based on the fact that the bonds were issued under New York law.

If the Supreme Court were to seek the New York court's opinion, that additional legal procedure would delay the justices' consideration of whether to take the case.

If the justices agree to hear the case, a decision could come between October, when the next Supreme Court term begins, and June 2015, the end of the term.

In November 2012, U.S. District Judge Thomas Griesa ordered Argentina to pay the $1.33 billion into a court-controlled escrow account.

A three-judge panel of the 2nd Circuit upheld Griesa's order in August, but put it on hold pending an appeal to the Supreme Court. If the high court declines to hear the case, the appeals court ruling would be left intact.

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Comments (3)
GermanHoldout wrote:
What Argentina does, is blackmailing the U.S. Supreme Court. (if you do not accept our will, we will go in technical default)

In the “Pari Passu” issue the Holdouts are 100% right! It would be helpful, if the US Supreme Court promptly rejected the argentine appeal. (and so refusing the Blackmail attempt)

Argentina clearly has the capacity to repay the debt to the holdouts after more than a decade! The outstanding debt is only approximately 12 Billion (incl. accrued interest) to the holdouts. It is not much for the 3. largest economy in South America.

Argentina should rather sit down and negotiate an acceptabble solution with the Holdouts!

Argentina’s nightmare default, this since 2002 ongoing HORROR must finally have an end!

We, the holdouts, have been suffering for more than a decade!!

Since 2002, Argentina has not paid a cent to the holdouts!

Beyond the U.S. Hedge Funds there are still tens of thousands retail Holdouts worldwide, most of them from Italy and Germany.

Most of the Holdouts are “before default buyer”, who have bought their bonds at an average of 100% or even over.

President Kirchner (by the way a beautiful women) should solve the holdout problem.

President Obama and the IMF should help and talk to President Kirchner to end Argentina’s Horror-Default.

Probably, also the US Court wants negotiations, and that is why, they STILL left the “stay” to give time for negotiations.

A reconciliation with the holdouts would improve Argentina’s ratings, initiate a firework of investments and also cheaper credits for argentine companies.

The argument:-> “If the U.S. courts uphold the complainant’s position, negative consequences will be felt by the U.S. and the rest of the world. Sovereign debt restructurings will be virtually impossible in the future.”

It is not true because, after Argentina’s 2001 Default all bonds imply the Collective Action Clause (CAC) A collective Action clause (CAC) allows a supermajority of bondholders (75%) to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring.

BUT, This CAC is NOT implied in Argentina’s defaulted old bonds! Accordingly, Argentina MUST fulfill the bond contracts and repay the debt to the holdouts!

If Argentina and the holdouts made NOW A BINDING AGREEMENT with respect to the “time after” (end of the “Rights Upon Future Offers (RUFO) clause in December 2014), seizure risks and a technical Default would be immediately averted. Argentina could immediately return to the capital market and thus Argentina could refinance the payments to the holdouts, without using reserves.

Holdouts want a simple, clear, secure and an ACCEPTABLE solution.

Holdouts DO NOT want such exotic financial constructs, as they were the swap conditions in 2005 and 2010, with an exorbitant Haircut, with many new bonds, with only Discount bonds above $50000, GDP Warrants etc.,and with maturities in the eternity. Such “shares like” financial constructs are inacceptable.

A swap from the defaulted old bonds to new bonds are unacceptable also for tax reasons. In Germany, for example, you would have to pay for new bonds 30% tax separately. That would mean an additionally haircut of ca. 30%.

Following simple conditions might be acceptable for the Holdouts .

- at the latest, on 01/01/2015 (end of RUFO clause) Argentina should repay in CASH 100% of the nominal value of the defaulted bonds, which became due before 2015.

- for the accrued interest between 2002-2015´Argentina should emit new bonds with 50% discount, and with a maturity of 5 years.

Feb 19, 2014 12:57pm EST  --  Report as abuse
GermanHoldout wrote:
Holdouts want a simple, clear, secure and an ACCEPTABLE solution.

Holdouts DO NOT want such exotic financial constructs, as they were the swap conditions in 2005 and 2010, with an exorbitant Haircut, with many new bonds, with only Discount bonds above $50000, GDP Warrants etc.,and with maturities in the eternity. Such “shares like” financial constructs are inacceptable.

A swap from the defaulted old bonds to new bonds are unacceptable also for tax reasons. In Germany, for example, you would have to pay for new bonds 30% tax separately. That would mean an additionally haircut of ca. 30%.

Following simple conditions might be acceptable for the Holdouts .

- at the latest, on 01/01/2015 (end of RUFO clause) Argentina should repay in CASH 100% of the nominal value of the defaulted bonds, which became due before 2015.

- for the accrued interest between 2002-2015´Argentina should emit new bonds with 50% discount, and with a maturity of 5 years.

Feb 19, 2014 1:01pm EST  --  Report as abuse
GermanHoldout wrote:
The argument:-> “If the U.S. courts uphold the complainant’s position, negative consequences will be felt by the U.S. and the rest of the world. Sovereign debt restructurings will be virtually impossible in the future.”

It is not true because, after Argentina’s 2001 Default all bonds imply the Collective Action Clause (CAC) A collective Action clause (CAC) allows a supermajority of bondholders (75%) to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring.

BUT, This CAC is NOT implied in Argentina’s defaulted old bonds! Accordingly, Argentina MUST fulfill the bond contracts and repay the debt to the holdouts!

If Argentina and the holdouts made NOW A BINDING AGREEMENT with respect to the “time after” (end of the “Rights Upon Future Offers (RUFO) clause in December 2014), seizure risks and a technical Default would be immediately averted. Argentina could immediately return to the capital market and thus Argentina could refinance the payments to the holdouts, without using reserves.

Feb 19, 2014 1:02pm EST  --  Report as abuse
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