By Ken Parks and Michael J. Casey
The U.S. Second Circuit Court of Appeals is deliberating over a closely-watched case that could determine whether holders of Argentine bonds continue to get paid and which might set an important precedent for sovereign-debt markets worldwide.
Alex Frangos/The Wall Street Journal
A group of creditors is hoping the court will uphold a New York District Court’s ruling that Argentina pay them around $1.4 billion in back-payments on bonds that have been in default since 2001. In contrast, the Argentine government wants it to approve a proposal that these “holdouts” get the same heavily reduced payout that went to bondholders who participated in two prior debt restructurings.
The appeals court, whose decision could come any time between now and the end of the summer, could adopt either of those positions, or lay out some compromise in between. And because Argentina has vowed to appeal any negative ruling to the Supreme Court, the court might also decide whether to extend a stay on execution of the lower court’s ruling. That ruling — based on the principle of pari passu, or equal treatment — bars Argentina from making payments to holders of the restructured exchange bonds unless it also makes good on its legal obligation to the holdouts.
If the appeals court rules against Argentina it must also address whether the government’s New York-based trustee banks remain enjoined in the District Court’s ruling, which bars them from acting as the conduits of any payments that fall foul of thepari passu requirement. And it could compel the Argentine government to put money covering the holdouts’ claim in an escrow account while it makes an appeal to the Supreme Court.
The bottom line is whether Argentina, which has vowed never to pay the holdouts their full claim, will be driven into what investors characterize as a “technical default” on its exchange bonds. In play, according to Bank of America BAC +0.22% Merrill Lynch, is a $42 million payment on Argentina’s Global 17 bonds on June 2, followed by a $345 million amount due on June 30 for its Discount bonds.
Observers believe the government will seek to make payments offshore to avoid operating in a U.S. jurisdiction, but that would require major legal adjustments to bond contracts and payment mechanisms. And it could still be deemed to be a technical default.
Here is a summary of the various scenarios and what the bottom line in each case is for Argentine bondholders:
• SCENARIO I: The court orders Argentina to pay, lifts the stay and keeps payment banks enjoined.
RESULT: Argentina, which has repeatedly refused to pay the holdouts the value of their full claim, goes into technical default. Unless Argentina gets a new stay to allow the Supreme Court to consider an appeal from Argentina, those bonds would tank on this news.
• SCENARIO II: The court orders Argentina to pay, lifts the stay, but payment banks are not subject to court order.
RESULT: Argentine bonds will likely rally, as the country will still be able to make bond payments while it appeals to Supreme Court.
• SCENARIO III: The court orders Argentina to pay, keeps the stay in place without an escrow deposit, all pending a Supreme Court appeal.
RESULT: Argentina bonds rally as the end line is moved back. Argentina remains in judicial purgatory for months.
• SCENARIO IV: The court orders Argentina to pay, keeps the stay in place but orders the country to place more than $1 billion in an escrow account as a deposit pending a Supreme Court appeal.
RESULT: A technical default is likely as Argentina won’t put the money in escrow and will instead seek to pay bonds outside of the U.S.
• SCENARIO V: The court rules in favor of Argentina, saying that its low-ball offer satisfies the principle of pari passu.
RESULT: A big rally in Argentine bonds. A positive ruling for Argentina “will translate into an immediate knee-jerk recovery of sovereign risk back to October levels if not higher,” according to Jefferies head of Latin America Strategy Siobhan Morden. Bond prices plunged in October when it appeared likely that the U.S. courts would block payments unless the claims won by the holdouts were settled.