World Economy

Argentina Compromises on Debt

Argentina Compromises on Debt
Argentina Compromises on Debt

Argentina offered a $6.5 billion cash payment to creditors who hold its defaulted bonds on Friday, seeking to end a festering legal battle that transformed the country into a financial markets pariah.

Argentina’s Finance Ministry said two out of six leading bondholders had already accepted the offer and the US court-appointed mediator hailed the proposal as an “historic breakthrough”, Reuters reported.

The offer, if accepted by all litigating bondholders, would represent a roughly 25% discount, or so-called haircut for creditors after they filed claims of about $9.9 billion.

The turning point in the decade-long legal fight stemming from Argentina’s record default on around $100 billion in 2002 comes less than two months after President Mauricio Macri, a free-market advocate, took office and expressed his commitment to a deal.

The finance ministry said the offer entailed “a payment of approximately $6.5 billion if all the bondholders accept it”. It followed five days of intense talks in New York between Finance Secretary Luis Caputo and New York hedge funds led by Elliott Management.

“Two of the most important holdout bond holders have accepted the terms of the proposal. We have had a good reception of the proposals and I feel optimistic,” Caputo said.

Montreux Equity Partners and Dart Management were the two US hedge funds that accepted the offer, according to the ministry.

  Two Proposals

Elliott Management and a second lead creditor, hedge fund Aurelius Capital Management, both declined to comment on the Argentine offer, which contains two separate proposals.

The first proposal offers holders of defaulted Argentine debt who never joined the US lawsuit full payment on the principle value of their bonds plus 50% extra. That mirrors an agreement reached with 50,000 Italian creditors earlier this week.

The second proposal applies to all creditors who have sued Argentina through the US law courts. It offers a 30% reduction on a creditor’s total claim. If the investor agrees within two weeks, the reduction or so-called haircut will be trimmed to 27.5%.

“This is a big step in the right direction but this is not the end of it. Until the main holdouts accept a deal it is not over,” said Diego Ferro, co-chief investment officer at Greylock Capital Management in New York. “The good news is, this shows a commitment by the government to resolve the issues.”

The payment will be financed through new sovereign debt issuances.

Alejo Costa at the Buenos Aires-based investment bank Puente said a cash payment placed the financing risk in Argentina’s hands and offered the investors a premium.

  Next Challenge

Mediator Daniel Pollack praised Macri’s “courage and flexibility”. He said negotiations would continue with the other four leading holdout investors.

“A happy day for everyone,” said a grinning Pollack, as he stopped to speak with reporters before resuming his walk north on Park Ave.

If a settlement is reached, Macri’s next challenge will be to push it through congress, where no party holds a lower house majority.

His hopes for congressional approval got a boost on Wednesday when the main opposition party suffered a split, meaning he would no longer need to negotiate with the Front for Victory party of Cristina Fernandez to win a majority. Fernandez refused to settle with the holdouts and branded them “vultures.”

‘Vulture Funds’

Shortly after being sworn in last December, Macri opened negotiations with the bond-holders. His predecessor, Fernandez, had refused to negotiate with the investors, calling them “vulture funds”, BBC reported.

The bonds were bought by hedge funds NML and Aurelius Capital Management for a fraction of their face value in the aftermath of Argentina’s economic collapse in 2001.

The South American nation defaulted on its debts at the time.

It has since renegotiated its debts with 92% of the creditors who agreed to settle for one-third of what they were originally owed.

However, the hedge funds bought up a large chunk of the remaining distressed debt at low prices, and demand to be paid the full face value of their holding–$1.3 billion.

New York Judge Thomas Griesa ruled in 2012 that Argentina must pay the creditors in full.

In June 2014, the US Supreme Court declined to hear Argentina’s appeal against the decision. Argentina refused to pay and went on default.