Argentina Open to Talks with Holdout Bondholders

NEW YORK (The Deal) -- The Republic of Argentina has assured bondholders who already restructured their sovereign bonds, that the nation won't default again, and is ready to open discussions with its holdout bondholders.

According to a source close to the situation, Cleary Gottlieb Steen & Hamilton's Carmine Boccuzzi, one of Argentina's legal advisers, said during a Wednesday, June 18 meeting in with Judge Thomas Griesa in the U.S. District Court for the Southern District of New York that he's been told that Argentine officials plan to start negotiating next week with holdouts.

The Republic of Argentina has assured its bondholders, who already restructured their sovereign bonds after Argentina defaulted on about $93 billion in debt in 2002, that it won't default on those obligations again. However, the plan to continue paying its bondholders and avoid a near-term default is fraught with pitfalls.

The U.S. Second Circuit Court of Appeals on Wednesday lifted a stay on its ruling that Argentina must pay all of its bondholders, including holdouts, if it pays any of them, now that the U.S. Supreme Court decided on June 16 to let the lower court rulings stand.

That gives Argentina a July 30 deadline, accounting for the 30-day grace period after its approximately $225 million June 30 interest payment is due, to find a way to pay its restructured bondholders and avoid a default.

Argentina's economy minister Axel Kicillof said in a televised address late Tuesday that Argentina can't comply with the U.S. court order to start paying its holdouts if it continues to pay the restructured bondholders.

Kicillof announced that an exchange offer is in the works, which would allow restructured bondholders to swap their foreign law securities for Argentine law securities. The goal would be to put those payments outside of U.S. jurisdiction. However, Judge Griesa, who made the original ruling on the bond payment parameters, mandated anti-evasion orders, which make it difficult for the involved parties to skirt his ruling.

Analysts at Credit Suisse (CS) suggested in a June 17 report that an exchange offer into Argentine law bonds might risk violating those anti-evasion measures.

"[I]t is unclear whether a foreign investor could be liable for helping Argentina evade the injunction," Credit Suisse said in the report. "This could potentially mean future contingencies for investors if Argentina is found to be breaching a court order."

Adding to those investors' worries is the fact that local law bonds generally offer weaker legal protection, Credit Suisse said. Furthermore, the new bonds wouldn't be eligible for inclusion on major bond indices, which could force some investors to sell their bonds, the analysts warned.

Barclays  (BCS) analysts said in a report Wednesday that many investors may be unwilling to participate in the swap because of potentially troublesome consequences.

"The possibility of a low participation local swap would increase holdouts and litigation because some current holders of exchange bonds are distressed accounts," the analysts said.

Joshua Rosner, a managing director at research firm Graham Fisher & Co., in a June 18 report, said that he doesn't expect restructured bondholders or financial intermediaries, such as banks that process bond payments, would be willing to participate in the swap, given the possibility for legal liabilities.

Moody's Investors Service analyst Gabriel Torres said by phone on Wednesday that he is miffed by the widespread discussion of a potential "technical default" by Argentina noting that if Argentina goes forward with the proposed swap, it will "almost certainly" result in a "real" default, depending on how the swap is structured. Torres also noted that Argentina faces challenges in getting investors to participate in a swap to Argentine law bonds, since some firms are not allowed to hold foreign-law bonds.

Amid these troubles, Argentina has warned that is may have trouble reaching a settlement to pay its holdout bondholders.

Argentine officials have trumpeted a hefty $15 billion estimate of potential obligations due to holdouts, which accounts for more than half of the country's foreign currency reserves.

The bondholder group that litigated to recover unpaid funds, led by hedge funds NML Capital Ltd. and Aurelius Capital Management, is owed a notional claim of $430 million that has appreciated to $1.5 million. However, some investors who didn't participate in the litigation are expected to approach the New York District Court and seek to get the benefit of the judgment.

Analysts are skeptical of the $15 billion potential obligation estimate.

Citigroup (C) analysts suggested in a report Wednesday, that in order to resolve the issues raised by litigating holdouts, "the claims are likely much less than the $15 billion that Argentina mentions."

Bondholders seeking to cash in on the judgement would face significant legal hurdles, the analysts said, adding that bondholders who are currently seeking judgments to the tune of $6.2 billion "cannot easily claim pari passu treatment," referring to the pari passu clause in the bond indenture, which demands equal treatment for all bondholders.

There is also a possibility that some holders seeking equal treatment at this late date could be dismissed, since they have waited so long to come forward, the Citigroup report said.

Citigroup analysts estimate that a maximum of $5.5 billion in claims could be subject to pari passu treatment.

As Argentina scrambles to structure an exchange offer that banks and bondholders could participate in without violating a U.S. court order, the stakes are high. Barclays maintains "that the damage of a default on the economy would be substantial."

Standard & Poor's said on June 17 that it would consider an exchange offer into Argentine law bonds or an interruption of payments to those bondholders as a "selective default," but wouldn't consider another skipped payment to holdouts as a new default. Argentina owes a $67 million interest payment on its par bonds in September, the ratings agency said.

Barclays analysts expect that, sooner or later, Argentina will negotiate a settlement with its holdout bondholders. They suggested in their June 18 report that Argentina and its advisers may hope to convince Judge Griesa to put a stay on his ruling while the parties attempt to reach a settlement.

A Cleary spokeswoman and an Aurelius spokesman declined to comment. A spokesman for NML couldn't be reached for comment.

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