Published November 28, 2012
NEW YORK – Argentina has won a reprieve against having to pay $1.33 billion next month to "holdout" investors who rejected a restructuring of its defaulted debt and have waged a long legal battle to get paid in full.
A U.S. appeals court granted an emergency stay order on Wednesday that gives Argentina more time to fight a debt ruling favoring the holdout creditors and eases investor fears of a new default as early as next month.
Last week, U.S. District Judge Thomas Griesa ordered Argentina to deposit the $1.33 billion payment by December 15 for investors who rejected two restructurings of bonds left over from its massive 2002 default.
Griesa's order raised the risk of a technical default on about $24 billion worth of debt because it meant Argentina would have been unable to repay bond holders who agreed to take a severe haircut in two debt exchanges in 2005 and 2010 without also repaying those who did not.
Branding the holdouts as "vulture funds," the government has vowed never to pay them and it swiftly appealed Griesa's ruling.
Argentina argued that, if left to stand, the order would make future restructurings impossible for countries facing debt crises because creditors would have no incentive to exchange their bonds at a discount.
However, legal sources in this niche area of sovereign debt restructurings counter Argentina and the exchange bondholders argument by stating that Griesa's order was narrowly focused on Buenos Aires recalcitrant behavior.
Another reason why future restructurings may not be affected is due to the broad adoption of collective action clauses in the rules governing a bond offering. Collective action clauses are a mechanism for issuers to force a restructuring on all bondholders if a majority vote in favor of an exchange deal.
The measures were first introduced by Argentina's lawyers, Cleary Gottlieb Steen & Hamilton in 2002.
In its decision on Wednesday, the 2nd U.S. Circuit Court of Appeals put off until well into 2013 a ruling on whether or not Argentina will have to pay in full the holdouts who refused to participate in its two restructurings, which paid less than 30 cents on the dollar.
"The extension of the stay brings back rationality and due process to a litigation that was being rushed through in a manner that understated the importance of the huge precedent that the district judge was seeking to set," said Vladimir Werning, an emerging markets economist at JPMorgan in New York.
Both Argentina and bondholders who took part in the exchanges filed appeals to the 2nd Circuit against Griesa's order. The appeals court will hear oral arguments on February 27.
"The threat of default has been removed for now," said Ignacio Labaqui, who analyzes Argentina for emerging markets consultancy Medley Global Advisors.
"This is really good news for Argentina and exchange bond holders," he added. "The ruling came faster than expected, which sends the message that Griesa's decision may have been too harsh, from the point of view of the appeals court."
Lead holdout investors Elliott Management Corp and Aurelius Capital Management both declined to comment on the 2nd Circuit's decision.
There was no immediate reaction from the Argentine government. Lawyers for the holders of Argentina's exchanged bonds, however, welcomed the 2nd Circuit's order.
"The stay ensures that the exchange bondholders will receive their rightful payments through December, and until the Court can carefully consider the significant issues and interests that are involved before rendering its final ruling," said the statement from law firm Boies Schiller & Flexner LLP.
(Additional reporting by Basil Katz and Nate Raymond in New York and Hugh Bronstein in Buenos Aires; Editing by Kieran Murray, Andrew Hay and Andre Grenon)