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
Elliott is using similar tactics with Argentina as it employed in
its successful pursuit of Peru's sovereign debt. It bought up
defaulted Peruvian commercial bank loans starting in the mid-1990s
and used the pari passu argument to collect on the debt.
In the dispute with Peru, Elliott was first rejected in both U.S.
District Court in New York and a Belgian commercial court, but later
won on appeal.
In Belgium it succeeded in getting an injunction blocking payment,
similar to the way U.S. District Judge Thomas Griesa blocked Bank of
New York Mellon from distributing payments to exchanged bondholders.
These victories over Peru forced a face-off with President Alberto
Fujimori, who was then facing corruption and human rights violation
charges. Blocked by the courts and with just days to go before a
default could be declared, Peru caved and did not fight Elliott any
further.
"At the same time Elliott was trying to negotiate. But also remember
that Fujimori was caught up in a corruption scandal investigation. I
think he just didn’t have the focus and settled," said Humes.
Elliott spent just over $11 million on the loans and walked away
with about $60 million just weeks before Fujimori fled the country,
the Peruvian government said in its official report.
Elliott has used its financial muscle in the corporate world as
well. In the case of energy group Hess Corp., the firm pushed for a
corporate restructuring that resulted in its nominees joining the
company's board. It pressed for BMC Software to sell itself to
private equity firms after fighting a proxy battle in 2012 to get
two directors on its board in 2012.
Argentina has been a more intractable situation, with the current
dispute stretching into its second decade without a final
resolution. Moody's Investors Service says Argentina is the only
sovereign default out of 34 studied in the modern era to have
resulted in persistent litigation.
TRADING POSITION
Neither Elliott nor Aurelius have ever revealed their trading
position, making it impossible to know what profit they stand to
make after millions in legal fees and lost opportunities from the
tied up cash. But sources say they have owned Argentine debt prior
to the default in January 2002.
Multiple requests for comment from Elliott and Aurelius for this
story were unsuccessful.
Argentina's government says Elliott stands to make a 1,680 percent
profit in just six years if it gets the full payment on its portion
of an award of $1.33 billion plus interest handed down by Griesa in
New York. He based it upon the equal treatment clause.
Argentina was ordered to pay Elliott concurrently with the exchange
bondholders.
Buenos Aires deposited $539 million sitting in a BNY Mellon account
at the Central bank of Argentina in June, ahead of a regular
interest payment. BNY Mellon, the trustee for the bondholders,
hasn't moved the money because of Griesa's order.
That leaves Latin America's No. 3 economy closer to a new default on
July 30.
Holdouts, with a court victory to back them up, have said for years
that they're ready to negotiate, while the government has refused to
meet with them face-to-face. The holdouts have also said they would
accept bonds as part of any settlement rather than simply cash.
The court-appointed mediator has failed to get the two sides in the
same room, even after weeks of coaxing the government. Argentina is
sending a delegation to New York on Tuesday, mediator Daniel Pollack
said in a statement on Monday.
"I again urged direct, face-to-face conversations with the
bondholders, but that will not happen tomorrow," Pollack said.
Argentina and its lawyers at Cleary Gottlieb Steen & Hamilton have
argued that if it pays holdouts it opens itself up to an even bigger
liability in the tens or even hundreds of billions of dollars.
That liability is not just from other holdouts who never
participated in 2005 and 2010 but from those who did exchange their
bonds and thought they were protected by the so-called rights upon
future offers clause, or RUFO, that bars Argentina from voluntarily
offering better terms to exchange bondholders.
Even if they default, Griesa's injunction remains in force and legal
observers believe banks will be reluctant to do business in
Argentina for fear of violating the ruling.
"If they default, I think the holdouts lose some of their leverage
because the judge gave Argentina a choice. They opted for paying no
one and Elliott and Aurelius don't have any money yet," said one
senior lawyer who specializes in sovereign debt restructurings.
The lawyer's firm works for one of the parties to the case and
therefore spoke on the promise of anonymity.
"One way around RUFO is to have a sum equal to what has been paid to
the exchange bondholders paid into an escrow account, therefore not
violating the clause and wait until it expires," the lawyer said,
referring the RUFO expiration on Dec. 31, 2014.
(Reporting By Daniel Bases. Editing by John Pickering)
