Argentine debt defiance may strengthen holdouts' legal position

Tue Jul 29, 2014 1:07am EDT
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By Daniel Bases

NEW YORK (Reuters) - Argentina has fought in court for a dozen years against the claims of holdout investors in its defaulted debt, and Argentina has lost. The holdouts, led by Paul Singer's Elliott Capital Management and Mark Brodsky's Aurelius Capital Management, are still waiting to collect a single penny or peso.

Argentina defied court-ordered demands to pay all its bondholders by a June 30 deadline, and a 30-day grace period runs out this week. Argentina says a payment to its trustee bank insulates it against charges it doesn't pay its bills on time. It has described the holdouts as vultures and the judge who made the orders as unjust. The country has enough foreign currency to cover about five months' worth of imports, and billions of dollars of debt coming due next year. Until it pays the holdouts, it will remain locked out of international capital markets.

Having talked itself into a corner, Argentina now has to either swallow its pride and pay the holdouts, or keep its pride, accept another default and face isolation and penury. Making things worse for President Cristina Kirchner and Economy Minister Axel Kicillof, continued refusal will likely end up strengthening Elliott and Aurelius, two distressed-debt specialists who haven't amassed billions of dollars in assets by backing down from a fight.

"My sense is that the holdouts might get a stronger hand in a much worse situation because default is a Pandora's box," said Hans Humes, chief executive officer of Greylock Capital Management in New York who served as co-chair of the Global Committee of Argentine Bondholders (GCAB) and on the private creditor-investor committee for Greece's restructuring in 2011.

"Right now they are pari passu with the other payments. If there is a default they become likely senior to those bonds as the documentation on the exchanged bonds of 2005 and 2010 is weaker than what the holdouts sued on," Humes said, referring to the legal doctrine of treating all creditors equally.

In the realm of distressed debt investing, Elliott and Aurelius are among the big guns, buying up the bonds of troubled lenders for pennies on the dollar and then pushing to negotiate for profitable payments, sometimes through the courts. Elliott has about $24.8 billion in assets under management and Aurelius has about $4.5 billion. Argentina has about $30 billion in foreign currency reserves. Singer and Brodsky are both lawyers.

BATTLE WITH PERU   Continued...

Javier Pargament (L), deputy attorney general for Argentina, arrives for debt negotiation talks with court-appointed mediator Daniel Pollack in New York, July 24, 2014.  REUTERS/Mike Segar