Tuesday, March 1, 2016

Gov’t strikes deal with US holdouts

Special Master Daniel Pollack listens during a press conference in New York yesterday.

14-year battle set to end after agreement to pay US$4.6B to main ‘vulture’ funds

The 14-year-long conflict between Argentina and the so-called “vulture” funds was settled in principle yesterday, handing President Mauricio Macri a boost and paving the way for the country’s return to international capital markets.

Negotiators reached a US$4.65-billion agreement with the toughest hedge funds holding 2002-defaulted Argentine bonds, including Paul Singer’s Elliott Management, which led the challenge against the country in New York courts and managed to freeze Argentina’s foreign debt payments to its remaining creditors in 2014. Interests and payments to other bondholders could make that sum rise up to US$15 billion, according to government estimations.

The deal still has to be approved by Argentine lawmakers in Congress, who must vote to repeal the Padlock and Sovereign Payment laws. Macri’s administration plans to issue bonds to repay the holdout creditors, the government confirmed yesterday.

It was agreed late on Sunday and announced yesterday by the New York court-appointed mediator Daniel Pollack, and will see the four largest remaining holdout creditors get paid about 75 percent of the amount outstanding on their judgments, including principal and interest.

The holdout creditors will likely be paid from the proceeds of a large government bond offering. Under the terms of the agreement the holdout investors said they would not interfere with capital-raising.

According to the Finance Ministry, 85 percent of claims have already been settled following yesterday’s news, and the door remains open for the remaining debt holders.

The country has up to April 14 to come up with the money and repeal the laws, or else holdouts could terminate the agreement.

“This is a giant step forward in this long-running litigation, but not the final step,” Pollack said in his statement. “The agreement in principle is subject to approval by the Congress of Argentina and, specifically, the lifting of the Lock Law and the Sovereign Payment Law, enacted under an earlier administration and which would bar such settlements,” he said.

Singer brought numerous lawsuits against Argentina over the course of the dispute, with hearings before US District Judge Thomas Griesa that were appealed but failed to gain a hearing before the US Supreme Court.

He “was the central figure who involved himself intensely with me over the past several weeks on behalf of the ‘holdout’ bondholders. He was a tough but fair negotiator,” Pollack said.

Pollack, Elliott praise

Pollack had even stronger words of praise for the country’s officials involved in the talks, saying “their course-correction for Argentina was nothing short of heroic.”

“We are pleased to have reached an agreement with Argentina. We are hopeful that the completed negotiations, held under the aegis of Special Master Daniel Pollack, have cleared the way for other plaintiffs to reach satisfactory resolutions as well,” Elliott said in a statement yesterday.

The remaining largest holdout investors who accepted the deal include Aurelius Capital Management, run by former Elliott alumni Mark Brodsky, as well as Davidson Kempner and Bracebridge Capital.

A spokesman for Aurelius declined to comment.

Better terms?

The deal is seen providing Elliot and Aurelius, the principal drivers behind court conflict, better terms than the agreement they refused to accept in early February.

Yesterday’s agreement in principal “goes beyond” the offer announced on February 5, said Pollack in answer to questions about whether Elliott would be paid more.

Accounts covered by Griesa’s pari passu injunction had initially been offered 72.5 percent of their total claim, slightly below yesterday’s 75 percent estimate.

But Elliott still argued that it accepted a bigger haircut than other funds.

“Lead Plaintiffs have agreed to the terms in their agreement ... without insisting on terms equal to the best deal achieved by other plaintiffs,” Elliott said.

Earlier this month, Elliot and Aurelius argued that Argentina’s original proposal left it with less favourable terms than fellow holdout Dart Management, which along with Montreaux Equity Partners opted to accept the country’s negotiators’ first proposal.

Argentina also agreed to pay some of the holdouts’ legal fees, plus a settlement for claims outside of New York, according to Pollack.

A saga close to an end

Despite the deal, the main holdouts filed a motion in court yesterday urging Griesa not to lift the injunctions which freeze all Argentine debt payments because there are many other plaintiffs who have not yet settled the dispute. Griesa said he would lift the injunction if a deal was reached and those who accept start getting paid.

But analysts think the conflict’s closure is coming.

“There are few more holdouts but having Elliott on board paves the remaining holdouts to fall in line,” said Sean Newman, a senior portfolio manager at Invesco.

The legal saga has so far involved years of court battles, street protests in Buenos Aires, the seizure of an Argentine naval vessel in Ghana and increasingly complex laws as the previous administration attempted to bypass US jurisdiction to avoid accepting the holdout’s terms.

The holdouts rejected two prior debt restructurings in 2005 and 2010 that paid out roughly 30 cents on the dollar.

The investors who accepted those deals, referred to as exchange bondholders, have not been paid principal and interest on their bonds since 2014 due to a ruling by Griesa that no one would get their payments unless all creditors including Singer saw all of their claims serviced at the same time.

That ruling led some international credit agencies to declare a new default for the country.

Intense talks in 2014 with the Fernández administration ended without a deal and leaving Griesa’s injunction in place.

With 2015’s presidential election, candidates promised to settle the conflict in order to recover access to foreign currency, with Macri saying a settlement should be reached as quick as possible.

Little market reaction

Yesterday’s agreement did little to move the market, as investors had already priced it in, considering it highly likely.

Restructured bonds were trading essentially flat after Pollack’s announcement.

“It doesn’t have significant market moving consequences, but it is a day of symbolic importance,” said Alejo Czerwonko, emerging markets economist in the chief investment office at UBS Wealth Management. “These are clearly the toughest guys out there and they have reached an agreement with Argentina after litigating over a decade.”

“Everybody knew it was a matter of time,” said Patrick Esteruelas, a sovereign analyst at Emso Asset Management. Other analysts also say Argentine bonds are already valued by markets as if their credit rating was higher than it actually is.

Despite a broader bout of risk aversion, Argentina bonds have outperformed EM indices over the last month as markets anticipated a high likelihood that the country’s holdout saga was nearing an end.

Herald with Reuters, Bloomberg, Télam