Argentina: AC/DC, Are We On the Highway to Hell? // aus einem Papier der Citi Group vom 7.1.2013

7 January 2013 │ 11 pages Latin America

Emerging Markets Strategy

Argentina: AC/DC, Are We On the Highway to Hell?

 Markets have become increasingly optimistic on the chances of Argentina
eventually prevailing in the ongoing pari passu litigation. We believe the chances of
a technical default still remain high and recommend buying 2-year protection.
 Other than their October 26 ruling, the court of appeals (AC) has not provided much
insight into their thinking. While they have granted Argentina an extension of the
stay and denied the plaintiff’s request that Argentina should need to post a bond as
security, in none of their recent orders have they provided more than a few terse
statements, without disclosing their rationale.
 In their October 26th ruling, the appeals court already affirmed the basics of the pari
passu decision of Judge Griesa in the district court (DC). In the current proceedings,
it is likely they will mostly focus on the issues that were remanded to the DC –
namely the payment formula and the entities subject to the injunction.
 We believe that it is unlikely the payment formula will be modified significantly from
what the DC had ruled. Their ruling of pari passu affirmed the idea that the holdouts
bonds rank equally with the exchange bonds. Forcing the holdouts into the same
terms as the restructured debt, which some analysts have suggested the court may
do, would seem to be inconsistent with this decision.
 In our view, Argentina’s better chance of scoring a significant victory is if the entities
subject to the injunction are significantly limited. Our belief, based on the October
26 ruling, is that the Trustee will be subject and likely the depository as well. If all of
the entities are removed, the injunction would be toothless, and only Argentina
would be in violation by paying the exchange bonds without paying holdouts. We
even believe it is unlikely Argentina will allow itself to be in contempt of court.
 To readdress the pari passu argument, Argentina most likely would need to be
granted either an en banc hearing or else a writ for certiorari from the Supreme
Court. The likelihood of being granted an en banc hearing is very low, as the 2nd
Circuit traditionally grants very few. The recent brief in support from the U.S. may
increase Argentina’s chances, but we found that even in those cases where the
U.S. has made similar requests, the petitions have been denied by the 2nd Circuit.
However, it may indicate a higher probability of being heard by the Supreme Court.
 The amount of debt in this case is low, but Argentina is nonetheless unlikely to pay
to settle this suit, as other related suits remain. Settling with these holdouts would
not clear all legal risks for Argentina. While Argentina calculates that total
untendered defaulted external debt amounts to $6.7 billion in principal and $4.5
billion in interest, the calculation used for determining judgment amounts in lawsuits
thus far means the total potential liability could actually exceed $17 billion.