Argentina gets upper hand in debt battle

By Paul Kilby

NEW YORK, Feb 12 (IFR) - Argentina may soon regain access to the international capital markets and get the go-ahead to renew payments on defaulted bonds after gaining the upper hand in debt talks with so-called holdout investors.

The country has made good progress this month in its fight with litigant investors after the government offered US$6.5bn to creditors suing for about US$9bn in claims in US courts.

That offer has strengthened the South American country's hand in negotiations, arguably leaving the four holdouts that have so far declined to sign on to the deal on the back foot.

Indeed, the country's new finance team's conciliatory approach has cast doubt over the justification for maintaining a pari passu injunction imposed by the US courts that has prevented the sovereign from making payments on restructured bonds.

Argentina has made its offer conditional upon US judge Thomas Griesa lifting such restrictions - a necessary step for the country if it wishes to regain access to hard currency funding.

Griesa on Thursday ordered the holdouts to explain why the injunction should remain in force if the government can repeal the "lock law" that limits payments to holdouts and pay creditors who settle by February 29. Bondholders have until February 18 to make their case.

"It seems that the government has been able to turn the tide in US courts," said Ricardo Adrogue, head of emerging markets debt at Babson Capital.

"With the court welcoming the proposal, it might be more of an uphill battle for holdouts that were left not accepting the deal."

The developments come amid protests from so-called "me too" investors who complained that they have not been included in the latest negotiations.

In a letter to Griesa, lawyers representing such investors said the pari passu injunction should remain in place until Argentina cuts a deal with all holdouts.

"The pari passu injunctions have been the only thing that brought Argentina to the table," the letter said.

Billionaire Paul Singer's Elliott Management and Aurelius Capital Management, the principal drivers behind the sovereign's 14-year old battle with holdouts, are likely to agree with that sentiment after refusing to participate in the latest deal.

It was their lawyers who finally backed Argentina into a corner after winning the pari passu case in 2012, and that legal headlock has been seen as a key negotiating tool to extract better terms.

CHANGED CIRCUMSTANCES

Circumstances have changed, however.

The pari passu case was won at a time when the prior government refused to pay more than the 30 cents on the dollar, and when judgement claims in US courts appeared unenforceable.

Now that the new administration of President Mauricio Macri is offering better terms than those accepted by many creditors in 2005 and 2010 exchanges, Griesa might feel justified in lifting the injunction without the full consent of all holdouts.

"Griesa can always change the injunction upon a change of circumstances," said Marco Schnabl, a partner at Skadden Arps."I assume when Argentina petitions to remove the injunction, the request may not be made with the consent of all the holdouts."

BATTLE AHEAD

Argentina will have to settle with Elliott and Aurelius to truly put the holdout saga behind it, and those hedge funds are unlikely to go down without a fight.

Aurelius was quick to argue that Argentina's latest offer left it with less favourable terms than fellow holdout Dart Management, which along with Montreaux Equity Partners opted to accept the latest offer.

The government is offering to pay holders of defaulted bonds without a pari passu injunction 150% of their principal claim.

Under the offer, accounts covered by the pari passu injunction will receive 72.5% of their total claim, or 72.5% of the amount they have been awarded in US courts, if they accept the terms by February 19. Thereafter, they will only garner 70%.

"Argentina bought Dart's support by agreeing to pay its claim in full," Mark Brodsky, chairman of Aurelius Capital Management, said in a statement. "Aurelius would gladly accept such generosity, though we have always been willing to take a haircut."

Dart's and Aurelius's divergent views stem from their different legal strategies and the amount of interest they have earned.

Under US law, once a judgement has been won, interest on the claim is tied to the rate paid on short-term Treasury bills, said Schnabl.

Dart reportedly took this route as far back as 2003, when it won a US$595m judgement against Argentina through its EM Limited Fund.

Other holdouts, however, decided to hold off on a judgement in an effort to win the pari passu injunction and perhaps earn more interest on their claim.

Aside from the interest earned on the bonds themselves, investors seeking pre-judgement interest are entitled to 9%, said Schnabl.

That left them seeking claims on larger amounts, though initial principal amounts may have been comparatively small.

"It appears that Argentina tried in effect to put everyone on a broadly similar footing," said Schnabl.

"The bondholders earning pre-judgement interest may say that they are getting less than the court awarded them, while others are being paid in full, but one has earned pre-judgement interest at 9% and the others post-judgement interest of around 1.5%."

WINNING THE WAR

Argentina's war of attrition may be paying off after already cutting a deal with Italian bondholders for close to US$1.35bn.

With Dart and Montreaux on board as well, the South American nation has garnered some sympathy, including from Daniel Pollack, the court-appointed mediator presiding over the negotiations, who said he "stood solidly behind the deal".

"All this points toward a fresh attitude on the side of important stakeholders and we think it can help Argentina's negotiating hand," said Alejo Czerwonko, emerging markets economist in the chief investment office at UBS Wealth Management.

(Reporting by Paul Kilby; Editing by Matthew Davies)