October 24, 2013 9:40 am
Deal proposed for Argentine debt stalemate
The acrimonious legal battle between a group of hedge funds and Argentina that could tip the country into default, and make future sovereign debt restructurings harder, may yet enjoy a happy ending if a nifty plan floated by a rival group of hedge funds succeeds.
Under the scheme, which illuminates the dog-eat-dog style of the hedge fund world, Argentine exchange bondholders, who hold $28bn of restructured Argentine debt, would agree to pay so-called holdout creditors, who hold up to $8bn of defaulted debt, to stop their legal attempts to get Argentina to pay them in full.
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If that happened, the holdouts would get a higher payout; exchange bondholders would see the value of their Argentine debt rise as the threat of default is lifted, more than compensating them for the cross payment; while Buenos Aires could crow it had not caved in to what it calls “vulture funds” and also regain access to international markets.
It is a “win-win-win” solution for all three parties, says one source at a large exchange bondholder fund familiar with the discussions in the marketplace: “It’s just a question of getting everyone to the table at the same time . . . all that is needed is for the holdouts and exchange bondholders to come to terms on economics.”
Marcelo Etchebarne, an Argentine lawyer who follows the issue closely, agrees the plan makes sense. “Argentina upholds its public policy, [exchange] bondholders get the value of their bonds to go up and [holdout] plaintiffs get a better deal,” he said. “Otherwise we may face a default again next year . . . and everybody loses.”
That possibility of default arises because the holdouts, led by Elliott Management, recently won a New York legal ruling that effectively ordered Argentina to repay their bonds in full even though that could mean exchange bondholders are paid partially or not at all, triggering a “technical default”.
Gramercy Funds Management, BlackRock, MFS Investment Managament, AllianceBernstein and Brevan Howard – a group of bondholders with restructured Argentine debt that have supported Argentina in its legal battle against the holdouts – are thought to be behind the scheme.
Under the mooted plan, yet to be formally presented to either the Argentine government or holdout creditors, exchange bondholders would forego 20 per cent of their bond coupon payments for the next five years in return for Elliott abandoning its legal battle against Buenos Aires.
One novelty of the scheme is that it represents an inter-creditor solution, effectively removing Argentina from the equation and neutralising its promise not to pay holdout creditors a penny more than the bondholders who accepted restructured bonds following the country’s $82bn 2001 default – still the world’s largest ever.
Indeed, the exchange bondholder likened the country’s legal battle with holdout creditors, which may go to appeal at the US Supreme Court, as a fight between “an irresistible force and an immovable object”.
Argentina upholds its public policy, [exchange] bondholders get the value of their bonds to go up and [holdout] plaintiffs get a better deal. Otherwise we may face a default again next year
- Marcelo Etchebarne, an Argentine lawyer
However, a spokesman for NML Capital, one of the holdout litigants, was sceptical about the plan, citing Argentina’s unwillingness to negotiate: “It is absurd to think that Argentina’s debts can be resolved without Argentina’s participation. [We] have asked repeatedly for negotiations with Argentina, but Argentina appears to remain unwilling to come to the table.”
Charles Blitzer, a former IMF official, was also doubtful, describing the dream as “seductive but not persuasive”. One big sticking point is it would require 75 per cent of all exchange bondholders to agree to a plan which, in effect, cuts the value of their holdings.
“It’s a pipe dream,” he said. “The free rider problems are enormous.”
Be that as it may, the only other alternative to the impasse at the moment seems to be more legal wrangling. Argentina this week hired Paul Clement, a former US Solicitor General, to help in its defence, a move that could increase the likelihood of the US Supreme Court hearing Argentina’s appeal and so drag out this nearly decade-long case even longer.
Perhaps most important of all, little can also happen without at least a nod from Cristina Fernández, the Argentine president, who has not been seen in public since she was rushed to hospital for an operation on October 7 following a head injury and has since been placed under strict doctors’ orders to observe a 30-day period of total rest.
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