The U.S. Supreme Court left intact rulings that may force Argentina to pay billions of dollars to holders of repudiated bonds, rejecting the country’s appeal in a case that has roiled financial markets and triggered threats of a new default.
Argentine dollar bonds plunged today after the justices turned away contentions that lower court rulings misread bond agreements and violated the country’s sovereign immunity. Along with a high court ruling on another case related to the 2001 default, the rebuff is a victory for a Paul Singer-controlled hedge fund and other defaulted debt holders who have refused to accept the government’s restructuring offer of about 30 cents on the dollar.
The rejection leaves Argentina facing a court order to pay the holdouts in full before it makes payments to bondholders who accepted restructuring terms after the 2001 default. The country could try to negotiate a settlement, a step it so far has refused to take. Argentina, seeking to preserve central bank reserves, says it can’t afford to pay both sets of bondholders, fueling concern the country will default again.
“This is the end of the line for Argentina in terms of the judicial appeal process,” Richard Samp, chief counsel of the Washington Legal Foundation, which filed a brief in support of the holdouts, said on a conference call. “My guess is that any negotiation is going to have to be completed before the time of the next bond payment” on June 30.
The legal fight has put U.S. courts in the unusual position of shaping another country’s financial future. Lower court rulings have led Standard & Poor’s, Fitch, and Moody’s to lower Argentina’s bond ratings.
The dispute revolves around Argentina’s 2001 default on a record $95 billion in debt. The country offered to substitute lower-value bonds in 2005 and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt.
The Supreme Court also dealt Argentina a second blow today, ruling 7-1 that two banks must turn over information about the country’s assets worldwide. That case concerned efforts by Singer’s NML Capital to collect more than $1.5 billion in judgments it has won in U.S. court cases against Argentina.
The hedge fund is seeking to use the legal process of discovery to get information from Bank of America Corp. and state-owned Banco de la Nacion Argentina about accounts held by Argentina and hundreds of its officials.
Argentina calls investors who have refused previous debt exchanges “vultures” because they bought many of the bonds post-default at a discount, angling to eventually collect a windfall.
“Compliance will force the country to face a serious and imminent risk of default, with grave ramifications for Argentina, the exchange bondholders, and the capital markets,” the country said in a May 27 court filing. Carmine Boccuzzi, a lawyer who represents Argentina, didn’t immediately return a voicemail message seeking comment on the two rulings.
Argentine stocks tumbled, with American depositary receipts of state oil producer YPF SA plunging as much as 15 percent, while power distributor Empresa Distribuidora y Comercializadora Norte SA’s shares fell 18 percent.
Argentina is scheduled to make debt payments on June 30 on bonds due in 2033, which are in danger of being blocked by the lower court ruling. The notes, sold under New York law, fell 7.7 cents on the dollar, to 74 cents at 11:06 a.m. New York time, according to data compiled by Bloomberg. The extra yield investors demand to own Argentine debt over U.S. Treasuries widened 99 basis points to 836 basis points, the most in emerging markets, according to JPMorgan Chase & Co.
NML, an affiliate of Elliott Management Corp., had argued that an equal-treatment, or “pari passu,” clause in the bond agreement bars Argentina from treating the restructured securities more favorably than the defaulted bonds.
A federal trial judge agreed with that argument, as did the New York-based 2nd U.S. Circuit Court of Appeals in two rulings.
Argentina urged the Supreme Court to ask New York’s highest court whether that interpretation is correct under state law. The country also contended that the orders violate a federal sovereign-immunity law by dictating what the country must do with property located outside the U.S.
NML told the Supreme Court that Argentina has the resources to avert a default. “As the lower courts found, Argentina is perfectly capable of paying its debts, if it chooses,” NML argued.
The appeals court rulings in the case were on hold while the Supreme Court decided whether to get involved.
Justice Sonia Sotomayor didn’t take part in the court’s action today, possibly because she was previously involved in the litigation as an appellate judge. As is the court’s usual practice, Sotomayor gave no reasons.
Default on the Horizon?
The court also rejected a related appeal pressed by holders of the restructured bonds. The appeal argued that the lower courts exceeded their powers and violated the bondholders’ constitutional rights.
Argentina has given mixed signals about its likely next step. In an appeals court hearing last year, the government’s attorneys said the Latin American country wouldn’t “voluntarily” obey the court orders.
In its most recent Supreme Court brief, the country promised to comply with the orders, while saying the likely result would be a new default. Argentina says it lacks the resources to pay what ultimately could be $15 billion in holdout claims while also servicing the restructured bonds.
A default could occur as soon as June 30, when Argentina’s next coupon payment on $13 billion is due. According to a memo leaked to an Argentine website last month, the country’s attorneys recommended a default and immediate restructuring in the event the Supreme Court rejected the appeal.
Argentina’s economy minister last week raised the prospect of negotiating with the holdouts, a step the country has previously rejected.
Settlement discussions might be complicated by a clause in the restructured bond contract. That provision bars Argentina from “voluntarily” offering the holdouts a better deal than the other bondholders receive. The clause expires in December, and some lawyers dispute whether it is binding in Argentina in any event.
The first case denied review today is Argentina v. NML Capital, 13-990. The second case rejected by the court, filed by owners of the restructured bonds, is Exchange Bondholder Group v. NML Capital, 13-991. The high court’s decision requiring the two banks to turn over information was Argentina v. NML Capital Ltd., 12-842.