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Analysis: Argentina’s debt sale spurs excitement and more lawsuits

Posted in Articles, Features by dionrabouin on November 21, 2016

Argentina’s long-anticipated return to the bond market after more than a decade as a pariah in international capital markets has brought forth eager investors – and somewhat unsurprisingly, more lawsuits from jilted creditors.

Some fund managers say they are excited to take advantage of Argentina’s first international bond issuance – where the country is expected to sell up to $15 billion – since it failed to pay interest on some $100 billion in sovereign debt.

Officials in Argentina, too, are eager to put 14 years of legal battles stemming from the 2002 default behind them after a February agreement with the biggest holdout creditors.

But even as those issues have been resolved, smaller lawsuits have cropped up, including a suit filed last week by Greylock Capital Management, a well-known emerging market investor saying Argentina is still not treating investors equally. Greylock would not comment.

Since the election of President Mauricio Macri in November, Argentina moved swiftly to settle the debt dispute, mainly with U.S.-based hedge funds Elliott Management and Aurelius Capital that sued in federal court for full payment on sovereign bonds defaulted upon in early 2002.

Brett Diment, head of global emerging market debt at Aberdeen Asset Management PLC in London, noted that his firm has a position in the bonds that Argentina was not paying interest on.

“The new government has reached an agreement with the plaintiffs and to pay those plaintiffs Argentina needs to issue bonds. We were excited and positive because it means Argentina will go current on the securities that we own,” he said.

Two teams of Argentine officials are meeting investors in New York, London, Los Angeles, Boston and Washington this week seeking prices on 5, 10 and 30 year debt.

Preliminary reports indicate the interest rate Argentina might offer on the new bonds is in the 7.5 percent to 8.5 percent range. Investors have said the debt sale presents a unique opportunity for an improving credit story in emerging markets, though some have said they would need to see yields of at least 8 percent and possibly as high as 9 percent to pique substantial interest.

John Baur, portfolio manager for Eaton Vance’s global macro absolute return fund, noted that much of the proceeds will initially be used to pay existing creditors and that Argentina will be selling a lot of paper.

“We think that the government is trying to do the right things, but they have a difficult road ahead of them. By no means is it guaranteed that they’re going to accomplish their objectives and set Argentina on the right course for the future,” he said.

LEGAL ISSUES CONTINUE

But the legal battle is still not over, even as the country has trumpeted its deal with the biggest creditors. Daniel Pollack, the court-appointed mediator in the legal case, says more than $8 billion worth of claims, or roughly 90 percent of those brought before U.S. District Judge Thomas Griesa in the Southern District of New York, have been settled in principle.

The Elliott-led group negotiated richer settlement terms than what Argentina offered via the public settlement proposal. It and several other large creditors signed a $4.65 billion deal on Feb. 29.

In response, on March 2 Griesa ordered his injunctions against Argentina only paying some creditors and not the holdouts be lifted, citing the progress in reaching settlements.

But some investors say they were ignored by Argentina or never allowed to negotiate. One group of investors, in a bid to stop Griesa from lifting his injunction, filed a lawsuit on March 25 claiming Argentina reneged on settlement agreements. Griesa disagreed and dismissed the lawsuit late on Tuesday.

“It’s a small percentage of claims. But to repudiate that debt creates unnecessary bad faith with some important investors at a moment when you need to maximize your issuance capacity,” said Siobhan Morden, head of Latin America fixed income strategy at Nomura.

Separately, the 2nd U.S. Circuit Court of Appeals on Wednesday upheld Griesa’s ruling to lift injunctions, ruling against the biggest creditors, who, in a sign of years of frustration, said Argentina needed its “feet held to the fire” to make sure they make good on their $4.65 billion settlement, as payments are due by Thursday.

Greylock’s lawsuit, meanwhile, which argues the country is not abiding by equal treatment laws, is still pending.

Mohammad Ladjevardian, a Houston-based investor, says the bonds he bought at full price before the default should be settled on the same terms as Elliott’s deal. But he claims he was unable to get anyone from Argentina to negotiate and in his anger filed a lawsuit against Pollack to have him removed from the case.

Ladjevardian said his experience shows how arbitrary the settlement process can be.

“Our case suddenly resonates with a lot of people,” Ladjevardian said, noting the money was invested for his family, including his now 93-year-old father who lost his fortune after escaping Iran in 1979.

Argentina is aware of the ongoing issues and the prospectus for the bond sale states it explicitly.

“The Republic cannot assure you that further litigation against Argentina will not negatively affect its assets or Argentina’s ability to access the international capital markets or make payments on the Bonds or its other outstanding debt,” the document says.

(Reporting by Daniel Bases and Dion Rabouin; Additional reporting by Sarah Marsh in Buenos Aires and Davide Scigliuzzo of IFR in New York; Editing by David Gaffen and Tom Brown)

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