Wednesday, August 20, 2014

Argentina Stuns Bondholders With Scorched-Earth "Cramdown" Plan ( August 20 , 2014 ) - with Argentina thumbing , what t its nose at the vulture firms and the US Court system ype of economic warfare against Argentina lays ahead will become known shortly

Argentina Stuns Bondholders With Scorched-Earth "Cramdown" Plan

Tyler Durden's picture

With the impasse over the latest Argentina default going nowhere fast, late last night president Kirchner stunned its creditors when she announced what amounts to a cramdown plan for holdouts, in which all bonds would be stripped of their existing indentures and converted to local law bonds. Or, as some would call it, a "scorched earth" transaction that burns all bridges, and goodwill, with the international creditor community and likely leaves Argentina unable to access global capital markets for the foreseeable future.
As part of its transaction Argentina would bypass the order issued by Judge Griesa halting payments to all creditors, not just the holdouts, and resume normalcy for the 90%+ of restructured bondholders while leaving Elliott, Aurelius and the like with little to no recourse aside from holding on to claims which would be two swaps behind, and with essentially no legal standing as it would completely bypass the Bank of New York (whom it would remove as trustee) custodian payment process and allow Argentina to make payments directly to those creditors it sees fit.
In essence, what Argentina plans to do is the opposite of what Greece did in 2012 when it defaulted on existing bonds, and swaped over into English-law bonds as an incentive for existing creditors, in effect promising it would never do it again. What Argentina has just shown is how easy it would be to "cramdown" bondholders who thought their "strong" covenants were safe when in reality all it takes is a government order to strip any and all of their indenture protection. Needless to say this has a very negative implication for Argentina's future ability to raise capital in the international arena for the near, and longer-term (at least until the ZIRP yield junkies come crawling back hoping to collect 10% if only for one year; the year after that will be some other Portfolio Manager's problem).
According to Bloomberg, the government will submit a bill to Congress that lets overseas debt holders swap into new bonds governed by domestic law with the same terms, President Cristina Fernandez de Kirchner said in a nationwide address yesterday. Payments will be made into accounts at the central bank instead of through Bank of New York Mellon Corp., the current trustee.
Holders of Argentina’s $30 billion of overseas bonds have been in limbo since U.S. District Court Judge Thomas Griesa blocked the nation’s attempt to pay $539 million in interest due by July 30. His ruling was meant to compel Argentina to resolve unpaid debts from its 2001 default. While most creditors agreed to provide debt relief, hedge funds led by billionaire Paul Singer’s Elliott Management Corp. refused and successfully sued for full repayment in U.S. court.

“The bigger picture hasn’t changed at all,” Will Nef, who helps manage $3.2 billion of emerging-market debt at Union Bancaire Privee in Zurich, said by phone today. “Argentina is still locked out of international credit markets because the issue with the holdouts remains unresolved.”
It may well be locked out, but if this plan goes through, it will remain in the good graces of its restructured bondholders, while taking the last bit of leverage the holdouts have. However, what is worse are the negative implications for international bondholder contractual terms.
Bloomberg has more on the details of the actual proposed swap:
Argentina plans to create a separate account for the holdout creditors such as Elliott, who own 7.6 percent of debt from 2001 and didn’t accept the government’s previous debt swaps. Payments for holdouts would be deposited under the same terms as the rest of its restructured debt, regardless of whether they decide to accept the swap. 

Creditors opting to keep their notes will also get payments locally under the plan, Fernandez said yesterday. Stephen Spruiell, a spokesman for New York-based Elliott, didn’t immediately reply to an e-mail seeking comment.

Daniel Pollack, a court-appointed mediator for the talks between Argentina and the holdouts, didn’t immediately return an e-mail seeking comment on the government’s proposal.
Curiously, alongside the announcement, with the situation suddenly quite "fluid", ISDA pushed back the date for the auction to settle Argentina’s credit-default swaps to after Sept. 2 from Aug. 21, according to its website. Argentina’s failure to pay interest on its bonds triggered a credit event and settlement of $1 billion of the default swaps.
Amusingly, as Credit Suisse's Casey Reckman summarizes, and who was quite negative on the announcement as per his overnight note, the Argentina plan would likely result in what is a contempt of court to Judge Griesa. From Bloomberg:
  • Foreign-law exchange bonds could be dropped from main Emerging Markets bond indexes if operation is completed, which could lead some investors to sell their holdings,Credit Suisse economist Casey Reckman writes in report.
  • Strategy could indicate reduced govt willingness to settle with holdout creditors once the Rights Upon Future Offers (RUFO) clause expires at year end
  • Sees increased risk that govt will leave the holdout issue for the subsequent administration to resolve
  • Debt swap would likely violate U.S. Judge Thomas Griesa’s orders against evading his pari passu ruling, which could result in Argentina being held in contempt of court
  • U.S. based financial intermediaries and investors could be wary of risking contempt themselves if they were to participate
  • While contempt of court may have few practical implications, it could further limit the already reduced potential for foreign financing flows until situation is resolved
  • Renewed motivation for settlement would probably have to be driven by economic circumstances, namely a significant decline in international reserves that threatens govt’s ability to continue servicing its USD-denominated obligations
In other words, in order to preserve some optionality, what is next on Elliott's agenda, would be nothing less than crushing the Argentina's economy, depleting the central bank's reserves, which at last check were just under $30 billion, or a little more than Elliott's AUM, and send the CFK administration packing. 
Can he do it? We eagerly await to find out. In the meantime, any Argentina "assets" abroad, be they naval or otherwise, are once again fair rehypothecation game.
Finally, keep an eye on the Argentina bond market where this development will likely play out on accelerated basis, now that Argentina has confirmed it will play "scorched earth" hardball with creditors.

Argentine Bonds Fall on Plan to Pay Bondholders Locally to Sidestep U.S.

August 20, 2014

Argentina's President Cristina Fernandez de Kirchner
Cristina Fernandez de Kirchner, president of Argentina. Photographer: Diego Giudice/Bloomberg
Argentina’s bonds sank the most in two weeks after the government said it plans to pay foreign-currency notes locally to sidestep a U.S. court ruling that blocked payments and caused its second default in 13 years.
The government will submit a bill to Congress that lets overseas debt holders swap into new dollar-denominated bonds governed by domestic law, President Cristina Fernandez de Kirchner said in a nationwide address yesterday. Payments will be made into accounts at the central bank instead of through Bank of New York Mellon Corp., the current trustee.
Fernandez’s move flies in the face of orders from U.S. District Judge Thomas Griesa that a swap would be illegal. He has said the nation must pay $1.5 billion to holders of debt defaulted on in 2001 or reach a settlement before resuming payments on restructured notes. JPMorgan Chase & Co. and Credit Suisse Group AG said the offer reinforces Argentina’s unwillingness to negotiate with the holdout creditors on a deal that would allow it to return to overseas capital markets.
“Argentina’s announcement is a cold bucket of water in the face for any restructured bondholders that were anticipating a negotiated holdout credit resolution by January 2015,” Vladimir Werning, an economist at JPMorgan in New York, said in a note to clients.
The country’s benchmark restructured bonds due in 2033 fell 2.43 cents to 80.2 cents on the dollar as of 2:17 p.m. in New York. The price is still above the 74.03-cent average of the past five years.

Aurelius: 'Argentine leaders have chosen to be outlaws'

Hedge fund Aurelius Capital Management has slammed Argentina's proposal to change the jurisdiction of restructured debt to Buenos Aires, in a move that the holdout investor called the nation's "latest plan to evade and violate US court orders". 

"Argentina's leaders have literally chosen to be outlaws. They have chronically flouted US court orders, lied to our courts, and proclaimed utter disdain for our courts," fired the vulture fund, in a statement released today. 

Aurelius, alongside Paul Singer's NML Capital, is one of the plaintiffs in the litigation held against Argentina presided over by judge Thomas Griesa in New York. The justice has repeatedly ruled that until holdout investors are paid, those 93 percent of bondholders who entered restructuring in 2005 and 2010 cannot receive funds. 

The hedge fund continued by claiming that it was the Argentine people that were suffering most from the current impasse. 

"Mistakes by the Republic's current leaders have already cost the Argentine people far more than what is owed to all so-called holdouts. These officials are now doubling down on an illicit and failed approach, as recommended last May by their US counsel," the missive asserts. 

"Contrary to government rhetoric, the only conspiracy that is harming Argentina's economy is composed of the nation's own leaders."

Kicillof warns 'no change of payment jurisdiction'

Economy Minister Axel Kicillof answers reporters'' queries on Argentina''s new move to ratify the country''s debt restructuring.
Economy Minister Axel Kicillof has briefed reporters on the bill submitted by President Kirchner to Congress yesterday that seeks to change Argentina’s payment "location."
“Argentina has proved a massive, almost unanimous and completely successful debt restructuring,” Kicillof assured as he accused US Court District Judge Thomas Griesa of “clearly favouring” so called vulture funds suing the South American country over its defaulted bonds more than a decade ago.
Saying the ruling by Judge Griesa is “impossible” to comply with as it involves the payment of 1.6 billion dollars to bondholders (including interests) that refused to enter the country’s 2005 and 2010 restructurings, the minister renewed the government’s position that vulture funds never actually intended to accept Argentina's debt swaps.
“These gentlemen bought bonds for 50 million dollars and Griesa says we must pay them now. Griesa says you can not pay the 92 percent of creditors (that did accept the swaps) if you don’t pay those who bought bonds for 50 million dollars that turned into 800 million dollars. A snowball,” Kicillof affirmed accusing the New York magistrate of holding bondholders “hostages” to push for a solution benefiting hedge funds.
Judge Griesa “clearly benefits” 1 percent of creditors “that never entered and never wanted to enter” the debt restructurings carried out by the Kirchnerite administration back in 2005 and 2010.
“We are here to defend our contracts facing a ruling that puts us in a situation of difficulty, to continue honouring (the country’s) commitments. That is the law of sovereign payment that we submitted to Congress and that we will defend,” the head of Argentina’s economic affairs stated adding the bill grants a possibility of "action" to bondholders that have seen their payment held at the Bank of New York as a result of Griesa’s order.
“Argentina will preserve its restructuring because the most speculative 1 percent not of Argentina’s but of the international financial sector will not attack Argentina through lobby (…) jeopardizing what we have done which is to return the 2001 disaster to normal,” Axel Kicillof said alluding to the social, economic and political collapse and historic default the nation plunged into 13 years ago.
“If the Bank of New York does not change its position, if Griesa does not allow the payment (…), we have ahead the September 30 due date and Argentina will pay,” Kicillof announced ratifying Argentina’s has not defaulted on its sovereign debt and that the Nación Fideicomisos S.A. represents a “safe” channel to secure payment to bondholders, removing the Bank of New York Mellon as payment agent.
Explaining that the government was not changing the payment jurisdiction – Griesa has already threatened a contempt-of-court order in such scenario - but seeking a “change of payment location” for bondholders to “collect” their money. “A government can not be banned from servicing its debt,” he insisted ratifying Argentina’s “unbreakable will” to pay.
Kicillof also expained creditors that refused the 2005 and 2010 swaps – only a 7.6 percent of bondholders – will be now able to access the restructuring. “They can come and exchange their bonds (ruled by Argentina’s legislation) and they will get a 300-percent-winning. Paul Singer wants 1,600 percent of profit because he is a vulture. But he can come and get 300 percent (of profit),” the economy minister assured now aiming at head of Elliott Management and US billionaire Paul Singer, one of the holdout creditors in the case.
“We will not allow that any other country or its justices put what Argentineans have done with effort and will continue to do,” Mr. Kicillof warned.

Gov't says 'contempt ruling' inapplicable to Argentina

Anticipating what seems an imminent order of contempt-of-court by US Judge Thomas Griesa following President Cristina Fernández de Kirchner’s decision to push a bill to change the payment jurisdiction to Buenos Aires, Cabinet Chief Jorge Capitanich pointed out that as a “sovereign country” Argentina cannot end up in contempt despite Griesa’s warnings.
“When they talk of contempt, they fail to see that Argentina is sovereign and has sovereign immunity,” Capitanich said in his daily press briefing at the government house. In the past weeks, Griesa has threatened the government with a contempt-of-court ruling and has specifically warned against a change of debt’s jurisdiction, which he said would be considered a breach of the ruling.
Asked about the consequences of such ruling, the chief of ministers said they “should be explained by the judge” because a contempt order “does not apply to a sovereign country as the Argentine Republic.”
Meanwhile, Capitanich also blasted “big concentrated transnational groups” seeking to “impose conditions to go back to vicious circle of debt and permanent extortion Argentina has suffered.”