Saturday, April 23, 2016

Argentina pays its way out of default

United States District Judge Thomas Griesa is seen in a recent photo arriving at his court.

New York judge ‘vacates injunctions in all cases’ as financial ordeal comes to an end

Following a US$16.5 debt issuance, Argentina paid US$9.3 billion yesterday to a group of creditors who had refused debt restructurings after the country’s 2002 default, closing the book on five years of messy litigation as President Mauricio Macri embraces global financial markets.

United States District Judge Thomas Griesa in Manhattan confirmed the payments and issued an order allowing Argentina to resume servicing its renegotiated bonds, lifting injunctions that barred Argentina from paying the 2005-2010 exchange bondholders until it settled with the holdouts.

“Having carefully reviewed the republic’s submissions, the court now finds that the conditions precedent have been met. Accordingly, the injunctions are vacated in all cases,” Griesa said.

Lifting the injunctions, one of many hardball tactics that Griesa authorized against Macri’s predecessor Cristina Fernández de Kirchner, required Argentina to repeal a series of laws in Congress that banned paying the “vulture” funds, followed then by transferring the funds — two conditions that have now been met by the country.

“Vulture” funds, led by Aurelius Capital Management and Elliott Management’s NML Capital, were among investors that received more than US$6 billion in settlements, according to court documents. Argentina also set aside about US$3 billion in escrow to cover holdouts that had not settled by February 29.

NML and Aurelius brought numerous lawsuits against Argentina over the course of the 15-year dispute, with hearings before Thomas Griesa that were appealed but failed to gain a hearing before the US Supreme Court.

With the injunctions lifted, payments on restructured bonds should resume in the next three weeks, the Finance Ministry said yesterday, totaling about US$3 billion.

“Judge Griesa expressed to me that it gave him the greatest pleasure to be able to exercise his discretion and lift the injunction as a result of the dramatically changed circumstances in Argentina following the election of President Macri,” Daniel Pollack, the court-appointed mediator in the case, said in a public statement.

“The court does not speak publicly, other than through its orders and opinions, but Judge Griesa has expressed to me that he is very gratified by this momentous development in the 15-year litigation which he has presided,” he added.

Argentina sold $16.5 billion of sovereign debt last week, the biggest bond sale ever from an emerging market and the country’s first global issue in 15 years. The deal raised funds to pay the settlements and paved the way for corporate borrowers. The country sold US$1.5 billion more than the US$15 billion originally targeted, at an average interest rate of 7.14 percent

As only US$9.3 billion were used to pay the holdouts, Central Bank foreign-currency reserves rose US$6.6 billion yesterday, closing at US$35.845 billion. Nevertheless, as about US$3 billion will be used to pay the restructured creditors next week, the net income on the reserves will be US$4.5 billion, to be used to balance the fiscal deficit and for infrastructure projects.

“Injunction lifted. No more shackles. No more clamps. #CiaoDefault,” Prat-Gay wrote on Twitter. “A new era is starting. Argentines are ready to start growing.”

The agreement with the holdout funds was also welcomed by US Treasury Secretary Jack Lew, who said it represented a “testament to the sea change in policy” under the Macri administration and the product of “Argentina’s new direction.”

“By taking decisive action to resolve a long-standing dispute, Argentina is turning a page on a difficult period of its history,” he said. “Argentina is moving to create more sustainable and inclusive economic growth and to reconnect with the global economy and the world community.”

Change of stand

Macri has focused on reconciling Argentina with global capital markets since he took office in December, curing the hangover of a US$100 billion default in 2002, the largest ever at the time. He has promised a deal with holdouts will help unleash a wave of foreign investment, bringing down inflation and reviving a stagnant economy.

More debt issuances are now set to follow, Prat-Gay said, as the country “is going to need much more credit in order to grow.” That would also be the case of companies and provincial governments, which would access cheaper credit thanks to the dea with the holdouts.

The country still keeps a low debt-to-gross domestic product (GDP) ratio, making future issuances a relatively easy sell too. According to Prat-Gay, international credit organisms such as the World Bank and the Inter-American Development Bank will now see Argentina as a less risky country, easing the flow of new funds.

“The agreement shows the change of attitude of the government. It’s the end of a long road that we should have never taken, the end of a bad management of the previous administration,” he said. “The economy reached a full stop after Griesa’s ruling. Macri asked me to end this chapter.”

Following weeks of debt talks, the Macri administration proposed a US$6.5-billion payment last month to settle the legal battle. Of the approximately US$9 billion still outstanding in claims, the government has asked creditors for an average 25-percent hair-cut, vowing to pay them up front in cash, facilitated through the issuing of new bonds.

A US$4.65 billion deal was reached with Elliott Management and Aurelius Capital, the toughest creditors, followed then by agreements by other holdout funds. Argentina had until April 14 to transfer the funds, a deadline that was finally extended as the case reached a US appeals court.

The “vulture” funds, which purchased the defaulted bonds at their marginal value, got a 1100 percent profit thanks to the deal, lower than the 1300 acknowledged by Griesa. It’s a much better deal than the one offered by the Cristina Fernández de Kirchner administration, which was only willing to pay them the same as the creditors who had accepted the 2005 and 2010 debt swaps.

Herald with Reuters