Argentina loses on pari passu claim

IFR 1958 3 November to 9 November 2012 | By Paul Kilby

Restructuring
Holdouts win claim for equal treatment

Holdouts had Argentina on the run last week after a US appellate court ruled that the country must treat all creditors on an equal basis, in view of pari passu clauses. The move could be a turning point in the long-running battle between the sovereign and investors that refused to participate in its 2005 debt exchange.
Supporters of the decision argue that the borrower may soon be forced to make a stark choice: either pay all creditors on an equal basis, including holdouts, or effectively default. Should Argentina decide to pay only holders of restructured bonds, any US intermediaries involved in the transaction would be in violation of the law, the sources added.

“The court decision is a game-changer”

“The court decision is a game-changer,” said Arturo Porzecanski, international finance professor at American University in Washington. “The government will soon have to decide whether it will comply with the court order and pay all investors their due or stop all payments and lapse into default, as it did in 2001.”
All three major rating agencies responded either by putting the sovereign on negative watch or, in the case of S&P, by downgrading it to B– from B.
“This ruling could effectively increase Argentina’s liabilities and the government’s debt service,” noted S&P, though it did not foresee an immediate impact, given that it remains unclear how the equal treatment provision will be implemented and how long this will take to define.

Pari passu

The district court that issued the initial injunction must now decide on the exact definition of the so-called “ratable payment” between the two types of creditors. Such a decision could prove complicated as the holdouts, led by Elliott Associates, have been asking for 100 cents on the dollar – much more than those who initially accepted the restructured debt.

“Any enforcement of pari passu would have to include a theoretical haircut for the holdouts or alternatively invite legal action from the restructured bondholders”

“What strikes us, and many investors, is the irony of the pari passu claim from holdouts that are unwilling in principle to accept equitable treatment to the restructured bondholders,” said Siobhan Morden, head of Latin American strategy at Jefferies.
“Any enforcement of pari passu would have to include a theoretical haircut for the holdouts or alternatively invite legal action from the restructured bondholders,” she added.
The sovereign’s next international debt payments are due on December 2 on the Global 2017 notes, December 15 on the GDP warrants and December 31 on the discount bonds. Given the Kirchner administration’s previous attitude towards holdouts and the so-called Lock Law that prohibits the government from offering them better terms, the sovereign is not expected to go down without a fight.
Holdouts are estimated to hold about US$1.3bn of debt with average interest of 10%, implying a yearly payment of US$130m or a total of US$900m for the past seven years, noted Rodrigo Covian, a trader at Bulltick in Miami.
Since the ruling was made public on October 26, Boden 2015s have fallen by about 8.5 points to around 81.5, while the sovereign five-year protection has gapped out by almost 1,000bp to 1,900bp.
“At first, we thought this was a buying opportunity, but with the US$900m we have to wait and see,” added Covian. “I am not sure if the order can be appealed and you don’t know where the appeal could go. It could bring a lot of volatility for sure, and you may see a lot of international investors dropping [Argentine] debt because they don’t want to see another battle.”

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