BUENOS AIRES – Argentina, battling to avert a fresh debt crisis, plans to offer suing "holdout" creditors a 25-year bond equal to the face value of their debt when the country defaulted in 2002, local financial daily Ambito Financiero reported on Wednesday.
The country faces a Friday deadline to respond to a U.S. appeals court order that it provide an alternative payment formula to resolve litigation with creditors seeking to be paid $1.33 billion in capital and interest on defaulted bonds.
Argentina's center-left government, which has said it cannot offer the holdouts more than what was received by bondholders who entered debt swaps in 2005 and 2010, must submit a formula and a timetable for carrying it out this week.
If the court does not accept the proposal, investors fear Argentina could default on $24 billion in restructured debt.
Ambito Financiero's report on Wednesday said the government's offer would propose giving the holdouts Par bonds equal in value to the bonds they have sued over at the time of the world's biggest sovereign default.
The newspaper, which did not say where it got the information, said that would be equivalent to about $450 million in 2038 Par bonds.
Holdouts would be offered Discount bonds - which carry a steep haircut - in exchange for the rest of the money demanded by the creditors in accumulated unpaid interest.
No one at Argentina's Economy Ministry could immediately be reached for comment.
In the 2010 swap - the terms of which Argentina says, by law, it cannot improve for the holdouts - a Discount bond maturing in 2033 and representing 33.7 percent of the face value of the defaulted debt was offered to institutional investors.
Par bonds for the full face value were also offered in the exchange three years ago, but only to small-scale investors wanting to tender a maximum of $50,000 or 40,000 euros in bonds.
"Offering Discounts for the past-due interest on the original bonds would constitute a more generous offer (than that of the swaps), and we have doubts that this will indeed be the offer proposed on March 29," Citigroup analysts wrote.
"(That) would be inconsistent with the government's previous statements that they would not offer holdouts anything more generous," the bank's research note stated.
Investors are closely watching the case, which is led by Elliott Management affiliate NML Capital Ltd and Aurelius Capital Management, because it has raised fears of a default on the restructured debt that was issued during the debt swaps.
Concerns ballooned after U.S. Judge Thomas Griesa ordered Argentina in November to pay into escrow the full $1.33 billion owed to the holdouts, an order Argentina immediately appealed.
Griesa's payment order followed his February 2012 ruling, upheld on appeal, which found Argentina violated the equal treatment provision in the bond contract known as pari passu. His order is meant to block any payment to exchange bondholders if full payment is not also given to the holdouts.
REHEARING REFUSAL HITS BONDS
Argentina has said it cannot abide by the court order to pay the holdouts in full, meaning a rejection of the payment proposal it submits this week would increase the chances for a default on the restructured bonds.
A decision by the 2nd U.S. Circuit Court of Appeals on Tuesday to deny Argentina's request for a rehearing on the underlying issues in this case hit the country's asset prices on Wednesday.
Analysts said the court's refusal appeared to be a warning to Argentina ahead of Friday's deadline to present a payment offer.
"The development is a negative event for Argentine sovereign credit as it suggests little sympathy from the court to the arguments Argentina uses in its defense against holdout creditors in the 'pari passu' litigation," J.P.Morgan said in a briefing note to clients.
"The timing of the decision to deny rehearing can be interpreted as a warning from the court," it said.
Argentina's 5-year credit default swaps were quoted at 3281 basis points on Wednesday afternoon, according to Markit.
Argentina's 2017 bond sank to 71.9 after shedding more than one point on Tuesday. The country's bond spreads over U.S. Treasuries on JPMorgan's EMBI Global index widened 20 bps after blowing out 32 bps in the previous session.
(Reporting by Helen Popper; Additional reporting by Sujata Rao in London and Daniel Bases in New York; Editing by W Simon and Richard Chang)