RPT-Acceleration threatens to make Argentina holdout crisis messier

Wed Aug 13, 2014 9:35am EDT

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By Davide Scigliuzzo

NEW YORK, Aug 12 (IFR) - Holdout investors' legal battle with the Argentine sovereign could get a lot messier should holders of newly defaulted debt decide to declare principal and interest immediately due.

The move, known as acceleration, could push Argentina into a new restructuring on up to US$30bn in debt and significantly complicate efforts to put its decade-long debt woes to rest.

"It would be a mess," said Antonia Stolper, a partner at Shearman & Sterling. "Once in that world, you have created a whole new set of holdouts and the situation could become highly unstable."

An acceleration on the restructured bonds would also deal a blow to a group of hedge funds led by Elliott Management and Aurelius Capital, who could suddenly have to share their claim with a much larger pool of investors.

"In the event of an acceleration, it is hard for me to imagine that Argentina would settle with (the holdouts) without having a plan for the exchange bondholders. It's just not realistic," said Stolper.

Accelerating their claims could also be a way for exchange bondholders to force holdouts to come to a compromise sooner rather than later.

"The only leverage the current restructured bondholders have over Elliott is to accelerate," said Thomas Mullen, a partner at TWM Capital. "Once this takes place, Elliott loses its advantage as being the only thorn in Argentina's side."

PAR HOLDERS

Holders of Argentina's par bonds could be the first to pull the trigger, as the securities they own are trading at around 50 cents to the dollar but become immediately due at par if accelerated.

"Some people have been accumulating positions, especially in the lowest priced bonds," said Mullen. "These bonds have the greatest upside in the event of a declaration of acceleration."

Their claim, however, is somewhat weakened within the first 60 days from the July 30 default, as Argentina has so far missed payments only on the discount bonds and any acceleration on the pars would be automatically reversed if payments on the discounts resume.

"The pars are not payable until September 30th, so any acceleration would have to be based on a cross-default with the discounts," said a lawyer familiar with the situation.

"If the default on the discounts were cured within 60 days, par holders' right to accelerate would disappear and any prior acceleration would be automatically rescinded."

To avoid showing their hand to the holdouts, par holders might decide to wait until closer to September 30 to accelerate, which would allow them to capture any upside on the bonds in the event that a deal between holdouts and Argentina is struck before then.

"The par holders may well prepare to accelerate, but hold off for a bit to see if the cross-default can be cured in time," said the lawyer. "I suspect that they prefer a settlement to Armageddon."

NOT WORRIED

Sources close to one of the holdout firms said the hedge funds don't see any real threat from acceleration, as any such process could be too cumbersome for some exchange bondholders and take a long time to be completed.

The acceleration requires the consent of at least 25% of holders of a particular series of bonds to be triggered. But after an initial notice is sent to bondholders, the process has a long way to go, leaving holdouts enough time to cut a deal with the sovereign.

Once started, however, the acceleration process would require higher threshold to be reversed, limiting the ability of a core group of creditors to use it simply as a negotiating tactic. "It only takes 25% to accelerate, but it takes 50% plus a full payment of missed coupons and accrued interest to reverse the acceleration," said Stolper. (Reporting by Davide Scigliuzzo; Additional reporting by Joan Magee; Editing by Paul Kilby)