Wednesday, July 30, 2014

Argentina/US: Update--Standard and Poor's Reduces CCC- to Selective Default

According to The Latin American Tribune, Standard and Poor’s said on Wednesday (July 30) that Argentina entered into selective default after failing to make interest payments to holders of restructured debt.

The $539 million to cover the payments arrived at Bank of New York Mellon a month ago, but the US federal judge who ruled in favor of holdout creditors demanding 100 cents on the dollar for Argentine bonds has barred Mellon from distributing the money.

Wednesday marked the end of the 30 days Argentina had to make good on the interest payments, which were due June 30.

S&P said it reduced Argentina’s rating from CCC- to SD because “the grace period expired with bondholders not receiving their payment.”

“If and when Argentina cures the payment default on the Discount Bonds, we could revise our ratings on Argentina depending on our assessment at that time of Argentina’s residual litigation risk, its access to international debt markets, and its overall credit profile,” S&P said.

COMMENT: As I've noted in the past, Buenos Aires does not realize that federal courts in the US don't negotiate.

The S&P announcement came as an Argentine delegation led by Economy Minister Axel Kicillof was meeting with the court-appointed mediator who has been trying to broker a settlement between Buenos Aires and the holdout creditors, a group of hedge funds, led by Elliott Management Corp.’s NML Capital Ltd unit and Aurelius Capital Management.

Argentina defaulted on roughly $100 billion in debt in December 2001, the largest sovereign default in world history, amid a financial meltdown and economic depression.

The vast majority of Argentina’s creditors accepted steep haircuts in 2005 and 2010 debt restructurings.

Some hedge funds that boycotted the restructurings sued Argentina in the United States for full payments on their bonds, bought at large discounts in 2002.

In 2012, US District Court Judge Thomas Griesa ordered Buenos Aires to repay more than $1.3 billion in defaulted debt to the litigating hedge funds.

Argentina’s appeal of Griesa’s decision reached the Supreme Court last month, but the justices not only declined to hear the challenge, they issued a separate ruling that enables holdout bondholders to ask US courts to compel Argentina to reveal the locations of assets, which has not been complied with.

Full payment to the hedge funds would lead other holdout bondholders to demand full repayment, according to Argentine President Cristina Fernández’s government.

Buenos Aires says those potential claims represent a liability of some $15 billion, equivalent to half of Argentina’s foreign-exchange reserves.

In a bid to avoid another default, the Argentine banking association on Wednesday put forward a plan under which Argentina's private financial institutions would offer to buy the bonds held by the holdout creditors, yet the US courts are unlikely to agree.