Argentine President Cristina Fernandez de Kirchner is offering a way out of default for investors in the nation’s overseas foreign-currency bonds.
The proposal her government is sending to congress would allow bondholders to ignore their current contracts and get paid in Buenos Aires, or swap their debt for new securities governed by Argentine law.
Here are three scenarios for investors to consider:
1. Hold your current bonds, issued under U.S. or English law, while Argentina deposits cash for interest payments in an account with a new trustee in Buenos Aires, instead of at Bank of New York Mellon. Because the terms of your contracts don’t change but will now be violated without your consent, you may be able to sue the government. Alternatively, you can stay quiet and take the cash payments—or in fact you could take the cash and then consider suing. The question remains: How will you actually collect your payments—do you need an account in a local bank?—and would there be legal ramifications for doing so?
2. Accept Argentina’s offer to formalize the change in payment mechanism and jurisdiction by voluntarily swapping your securities into new foreign-currency bonds governed by local law and with otherwise exactly the same terms. The problem is that some investors aren’t allowed to hold local law securities and would have to sell. For those who can participate, legal and logistical issues abound. A public tender would face legal challenges, particularly for the financial intermediaries required to execute the swap. U.S. District Judge Thomas Griesa specifically said as recently as June that such a plan would violate U.S. law.
JPMorgan Chase & Co. sees another scenario in the case of a swap whereby Argentina attempts to carry out a sequence of secondary market operations between investors and the government in which the nation is “left holding the foreign law restructured bonds in default indefinitely.” With local-law bonds in hand, investors still have to deal with potential local risks, such as the possibility that at some point Argentina decides to pay bondholders in pesos instead of dollars. It’s happened before.
3. If you don’t want the legal risks of participating in either of the above options, you could sell your bonds at a discount to other investors. Otherwise, you can hold onto defaulted bonds with the hope that the legal dispute that’s blocking payments eventually gets settled. Or you decide the swap proposal is Fernandez’s way of saying the dispute will never get resolved under her administration and seek to accelerate payment on the bonds by demanding full compensation of principal and interest. In that case, a restructuring may ensue.