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Argentina tries to pay restructured debt as clock ticks

Jun 27, 2014

Sovereign searches for time amid negotiations as payment deadline approaches

Argentina's attempt to service restructured bonds is an attempt to avoid violating an agreement that effectively bars the country from putting holdout creditors above restructured bondholders  before 2015, analysts said on Friday.

The finance ministry said it wired a payment for $832m on dollar bonds on Thursday. Including local currency payments, the total was more than $1bn, it said. The presidency said the payment included a $539m transfer to BNY Mellon, which is responsible for passing the cash on to bondholders.


 Source: Casa Rosada
US court orders say Argentina must pay holdout creditors before servicing restructured debt. It is expected that BNY Mellon will not put the payment through to bondholders because of the US ruling, but a bank spokesperson declined to comment.

The sovereign is in a tricky situation, though, as it agreed with bondholders participating in its 2010 debt restructuring that it would not offer better terms to holdout creditors, without extending the offer to all bondholders. That agreement is dubbed the RUFO clause, and expires at the end of 2014.

"The initial response [to US court rulings] from Argentina has been to consistently defy the judgment," Jefferies analysts said in a research note on Friday. "However, some interpret this as purposeful to show that any final payment to the holdouts was "forced" as a litigated settlement that would not jeopardize the RUFO clause."

An investor told LatinFinance that Argentina's attempt to pay restructured bondholders could be aimed at avoiding being declared in technical default, but he said the decision may put the country in contempt of court.

The sovereign is thought to be negotiating with holdout creditors over a solution. It has a 30-day grace period from Monday to pay restructured debt before entering default.

"Though we expect a favorable outcome in the end, we suspect that the negotiations are likely to go to the wire - until the end of the 30 day grace period for the upcoming June 30 bond payment, likely testing market confidence that the situation will iron itself out," analysts at Morgan Stanley said on Friday.

For Argentina to avoid default will depend on goodwill from both sides, said Jefferies - either the holdouts supporting a stay on the court ruling, allowing the sovereign to service restructured bonds in the interim, or Argentina "showing some flexibility to pay before July 30".

Argentina's decision to continue servicing restructured bonds created much doubt on how the situation will unfold, said Deutsche Bank analysts on Friday. The sovereign is aware of the "terrible implications" of a default, however, the bank said.

"[Argentine] authorities seem to be willing to use all available political and legal means to gain time and negotiation space," said Deutsche Bank analysts. "Therefore, although the Argentine government continues to show willingness to pay all creditors, negotiations to settle a proper formula might take time and likely prevent full debt service next week." LF

See recent coverage:

UN rails at Argentina debt ruling

Argentina asks Griesa for more time

Argentina default risk still looms, despite talks

Negotiation only way for Argentina, say specialists



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