Bloomberg News

Argentina Offers One-Sixth of Court-Ordered Bond Payment

March 30, 2013

Argentina, which defaulted on a record $95 billion in sovereign debt in 2001, proposed giving holders of $1.3 billion of the repudiated bonds about one-sixth of what a New York judge has said they’re entitled to receive.

The country’s filing of the proposed plan yesterday, less than an hour before a midnight deadline, paves the way for the U.S. Court of Appeals in New York to rule in a case in which a group of creditors, led by Elliott Management Corp.’s NML Capital Ltd., seeks to force the South American nation to pay after more than a decade of legal fighting.

Argentina said it proposes two possibilities for bondholders to exchange their defaulted debt for new bonds. Argentine officials will submit a bill to their nation’s Congress to provide for the plan to be implemented, the government said in a 22-page letter filed in court.

“Argentina’s proposal accounts for past-due amounts to bring the debt current, provides for a fair return going forward, and also gives an upside in the form of annual payments if Argentina’s economy grows,” the country’s lawyers said in the letter. “The proposal fulfills the court’s dual objectives to satisfy the pari passu clause: non-discrimination in payment priority and equal treatment among bondholders.”

NML Recovery

According to Argentina, the payment formula set by a New York judge that the country is challenging in the appeal, would pay NML Capital $720 million. That compares with an estimated value of $120.6 million for NML under one of the payment alternatives it is proposing, the so-called discount option.

In its letter, Argentina estimates that NML paid $48.7 million for the bonds in 2008.

“The formula adopted by the district court would cause great harm to the exchange bondholders while giving plaintiffs a return that is exorbitant on its face,” Argentina said in the letter.

In 2005 and 2010, Argentina offered its creditors new bonds, at a deep discount. About 91 percent of bondholders agreed to the debt restructuring. NML and other holdouts have tried to use U.S. courts to enforce their rights under the original bond agreements.

Argentina’s top leaders previously vowed never to pay the “vulture” investors, many of which bought the distressed bonds in hopes of turning a profit. Argentina’s legislature in 2005 passed a so-called lock law barring payment on the defaulted bonds.

A decision forcing Argentina to pay defaulted bondholders immediately would expose the nation to $43 billion in additional claims it can’t pay and trigger a new default, the government has said.

Par Option

Under Argentina’s proposal, a so-called par option would give bondholders new bonds due in 2038 in a nominal face amount equal to the amount of their defaulted debt, plus unpaid interest up to the end of 2001. The par bonds would pay interest that rises from 2.5 percent to 5.25 percent a year over the life of the bonds. They would also receive a one-time cash payment to compensate for interest they would have earned if the bonds had been issued on Dec. 31, 2003, according to the letter.

The holders would receive additional payments when the Argentine gross domestic product growth exceeds about 3 percent a year, the government said in the letter.

The discount option would give bondholders discount bonds due in 2033, that would be less than the defaulted amount, with an 8.28 percent annual rate and an increase in principal over time. They would be compensated for past due interest on those bonds with new bonds due in 2017 that pay 8.75 percent annually, according to the letter.

The holders would also receive GDP-tied payments, according to the proposal.

No Better Terms

Argentina said its proposal wouldn’t allow the plaintiffs in the lawsuit to force it to offer payment on better terms than those received by bondholders who agreed to the debt restructurings.

Eugenio Bruno, an attorney at the Buenos Aires law firm Estudio Garrido, said in an e-mail that Argentina’s proposal is similar to past debt-restructuring offers by the country that have been rejected by NML and the other holdouts.

If the government were to offer a better deal, it would trigger provisions allowing holders of the exchange bonds to take advantage of more favorable terms offered to the holdouts, he said.

Bruno represents Alfonso Prat-Gay, a former governor of Argentina’s central bank, who submitted a brief in the case supporting his country’s effort to overturn the ruling. Bruno said he also advises exchange bondholders and holdouts who aren’t involved in litigation.

Court Order

In November, U.S. District Judge Thomas Griesa in Manhattan said Argentina must pay the entire $1.3 billion claimed by the creditors in the lawsuit whenever it made any payment on its restructured debt. The issue was argued in front of the appeals court on Feb. 27.

On March 1, the appeals court ordered Argentina to provide a suggested formula for paying the creditors, led by NML Capital, which refused to take the restructured bonds at a deep discount.

Argentina’s lawyer, in the Feb. 27 hearing, “appeared to propose” an alternative to the payment formula devised by Griesa, according to the appeals court. The three-judge panel gave Argentina a final chance to influence its decision. The judges said they may ask the creditors to file a response before they issue a ruling.

Court’s Requirements

The judges said Argentina must tell them how and when it proposes to make current its payments on the defaulted bonds and the rate it proposes to pay. The panel also sought assurances that Argentina’s government would take the necessary actions to make the payments.

The panel said March 26 that it won’t grant a full-court reconsideration of its ruling in a related appeal. In that decision, the court barred Argentina from treating restructured- debt holders more favorably than holders of the repudiated debt.

The lower court case is NML Capital Ltd. v. Republic of Argentina, 08-06978, U.S. District Court, Southern District of New York (Manhattan). The appeal is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (New York).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

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


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