Bloomberg News

Argentina Asks Court to Overturn Order on Defaulted Debt

December 29, 2012

Argentina asked a U.S. appeals court to reverse rulings that would help Elliott Management Corp.’s NML Capital Fund among other creditors collect on sovereign debt the country repudiated more than a decade ago.

Argentina, which defaulted on a record $95 billion of bonds in 2001, filed a brief yesterday with the U.S. Court of Appeals in New York, arguing the rulings illegally interfere with its immunity as a sovereign nation and improperly exert authority over third parties.

“There is no authority permitting a U.S. court to order a sovereign to bring its immune assets into the U.S. in order to ‘turn over’ or distribute them to its creditors,” Argentina argued in the filing.

On Oct. 26, the appeals court ruled that Argentina can’t treat holders of its restructured debt more favorably than the so-called “hold-out” creditors, who declined to participate in two rounds of debt restructuring. Argentina argued yesterday that the court should ask New York State’s highest court to determine that issue under state law.

The appeals court also sent part of the case back to U.S. District Judge Thomas Griesa, who then ordered Argentina to make a $1.3 billion payment into escrow, the amount claimed by the defaulted bondholders in the case, when it makes scheduled payments on the restructured bonds. Griesa also barred third parties, including banks, from helping Argentina evade his orders. Those issues are set to be argued before the court on Feb. 27.

New Offer

The country said its executive branch plans to present to Congress a new exchange offer to holders of the defaulted debt, on the same terms as a 2010 restructuring.

The U.S. government, citing concerns about its assets and foreign relations, filed a friend-of-the-court brief yesterday supporting Argentina’s request for a rehearing in the case. The appeals court ruling improperly restricts the legal immunity afforded to foreign state property and also threatens the future resolution of sovereign debt crises, the U.S. argued in its filing.

Argentina defaulted on its sovereign debt in 2001 and offered to exchange the bonds in 2005 and 2010 for 25 cents to 29 cents on the dollar as part of a restructuring effort, according to court papers.

The country argued yesterday that linking the $1.3 billion payment to its obligation to service at least $24 billion of restructured debt improperly harms the interests of the restructured bondholders.

Third Parties

Argentina also said that Griesa’s order improperly implicates third parties, including the bond trustee and what Argentina called “broad, ill-defined categories of banks, clearinghouses, depositories and other entities comprising the international payment system.”

Restructured debt holders including BlackRock Inc. (BLK:US), Gramercy Funds Management LLC and Brevan Howard Asset Management LLP said in a court filing yesterday that Griesa’s order would likely result in no bondholders being paid.

The group, whose holdings total more than $1.5 billion, said in the filing that it is a “near certainty” that Argentina won’t make payments on any bonds if the lower-court order stands, according its papers.

Argentina has said previously that it doesn’t intend to pay holders of the defaulted debt who opted not to accept the country’s exchange offers, according to the filing. The country’s law also prohibits the payment of defaulted debt, the exchange bondholders argued.

Restructured Bonds

If the injunction isn’t vacated, it is “certain” that either the country will fail to pay the exchange bonds or that the payments will be frozen, the restructured bondholders group said in the filing.

Bank of New York Mellon Corp. (BK:US), trustee for restructured Argentine bonds, has told the court that Griesa’s order would force it to violate contractual obligations to the investors. BNY Mellon is responsible for ensuring that the restructured bondholders receive payments, it said in a filing to the appeals court. Under Griesa’s order, the bank would have to withhold the payments if Argentina doesn’t pay defaulted debt holders, according to the filing.

The case is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (Manhattan).

To contact the reporters on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net; Christie Smythe in New York at csmythe1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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