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Hurdles obstruct Argentina's path to restructuring debt
August 22, 2014 / 7:25 PM / in 3 years

Hurdles obstruct Argentina's path to restructuring debt

BUENOS AIRES, Aug 22 (Reuters) - Argentina’s proposed debt restructuring plan, designed to sidestep U.S. court rulings that led to the country’s default in July, faces massive legal and logistical hurdles that mean it may never get off the ground, lawyers said.

Left-leaning President Cristina Fernandez unveiled on Tuesday measures that would see the South American country make payments on debts held under foreign legislation in Argentina and push bondholders to bring their notes under Argentine law.

The U.S. judge at the centre of its debt battle with U.S. investment funds, who spurned restructured debt after the country’s record 2002 default and are suing Argentine for face value, said the plan violated his court’s past rulings.

While the draft bill is likely to enjoy smooth passage through a Congress dominated by political allies of Fernandez, Argentina faces a far tougher time persuading investors, financial institutions and legal teams that it is solid.

Huge question marks surround how Argentina will locate all holders of its debt across 15 separate bond series. Financial intermediaries with a U.S. footprint would need to collaborate in the process but in doing so they would risk being in breach of U.S. court rulings.

There are also serious doubts about the government’s proposal to replace trustee intermediary Bank of New York Mellon (BONY) with local bank Nacion Fideicomisos, a unit of state-controlled Banco Nacion. The move is an attempt to resume interest payments to holders of exchanged debt after they were blocked by District Judge Thomas Griesa, prompting the default.

“It doesn’t seem like a strategy that is capable of being implemented in a grand scale,” said Marco Schnabl of law firm Skadden, Arps, Slate, Meagher & Flom.

Even so, legal experts including Schnabl are cautious about writing off the debt plan altogether as Argentina has previously pulled off unexpected debt deals and unorthodox economic policies.

If the plan does unravel, it will either force Argentina back to the negotiating table in a weakened position or, if the government refuses more talks, leave the country mired in a messy default until presidential elections next year. Fernandez cannot run again.

FINDING BONDHOLDERS

Under the terms of the existing contract governing the bond swaps of 2005 and 2010, which 92.4 percent of investors accepted at huge writedowns, the trustee must hold a combined capital and surplus of at least $50 million.

Any trustee must also have a Corporate Trust Office in New York’s Manhattan borough and be conducting business under the laws of the United States.

Nacion Fideicomisos’ legal address is in central Buenos Aires and its website shows no indication of a presence in New York. As of December 31, 2013, its net worth was $16 million according to its latest balance sheet.

The bank did not immediately reply to Reuters’ questions seeking comment on whether it met both criteria.

“All they seem to be doing is establishing some mythical fiduciary account at Banco Nacion where it can send payments because the country does not want to send them to the Bank of New York Mellon,” said lawyer Antonia Stolper at Shearman & Sterling.

Griesa ordered Argentina not to carry out the proposed restructuring and ruled any entity assisting Argentina in avoiding his order would also be in violation of his court.

That means Argentina may have trouble identifying its bondholders, as clearing houses including Clearstream Banking AG and Euroclear or other entities may be reluctant to divulge any information.

“Argentina doesn’t have the faintest idea who the beneficial owners are,” said Schnabl. “They change on a regular basis when the bonds are traded and ownership is not registered anywhere other than the immediate place which holds the bonds.”

The bill also pushes bondholders to change the jurisdiction under which their Argentine securities fall and seeks to assure investors their payments would not be subject to the stringent capital controls Argentines and foreign firms face.

That would be complicated but might be possible “in jerry rig fashion”, said Stopler.

Financial intermediaries with U.S. footprints were unlikely to collaborate in the process making it difficult to carry out any steps that were needed to first verify and then extinguish restructured bonds governed by the current indenture, JP Morgan said in a briefing note to clients.

“The proposal is also a poor option because restructured bondholders have to be willing to accept local custodian and capital control risk,” JP Morgan wrote. (Editing by Richard Lough and Andrew Hay)

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