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Argentina loses appeal in $1.33 billion U.S. bondholder fight

Argentina on Friday lost its appeal of a U.S. court order requiring it to pay $1.33 billion to hedge funds that refused to accept steep discounts when the nation restructured its debt.

The decision by the 2nd U.S. Circuit Court of Appeals in New York is the latest in a standoff between U.S. courts and the Argentine government that some investors fear could lead Argentina to default. The court stayed the decision pending review by the U.S. Supreme Court, giving Argentina a reprieve and nervous investors some relief.

While Argentina and its supporters have said a ruling against it could threaten future sovereign debt restructurings, the court said the case was an "exceptional one" that would have little impact on future transactions.

The court also had harsh words for the government of Argentine President Cristina Fernandez, which has called the hedge funds vultures and vowed not to pay them.

"Argentina's officials have publicly and repeatedly announced their intention to defy any rulings of this Court and the district court with which they disagree," Circuit Judge Barrington Parker wrote for a three-judge appeals panel.

Argentina did not comment on the decision on Friday. Economy Minister Hernan Lorenzino, asked about the decision during a trip to Chile, declined to comment.

The case stems from Argentina's $100 billion default on its debt in 2001. In two subsequent restructurings, in 2005 and 2010, creditors holding about 93 percent of the debt received 25 cents to 29 cents on the dollar.

Dissident bondholders led by the hedge funds NML Capital Ltd, which is a unit of Paul Singer's Elliott Management Corp, and Aurelius Capital Management refused to go along with the restructurings, arguing in court that they should be paid in full.

The case came to a head in November 2012, when U.S. District Judge Thomas Griesa in New York ordered Argentina to pay $1.33 billion into a court-controlled escrow account for the dissident bondholders.

He also ordered Argentina not to pay its other bondholders without making the payment, raising the prospect that Argentina could go into default.

The U.S. Supreme Court starts its new term in October and, if it agrees to take the case, may not rule until the next June.

Initially, investors in Argentine assets breathed a sigh of relief, but by the end of the day the Merval index .MERV of Argentine blue chips had closed lower.

For the longer term, investors signaled continued worries.

The cost to protect $10 million of Argentine sovereign debt against default for five years rose to $2.53 million annually from $2.28 million on Thursday, according to Markit. The cost suggests that many investors consider it likely the debt will go into default.

"The court's decision against Argentina is what we have been expecting," said Stuart Culverhouse, head of research at Exotix in London. "Market disappointment may be tempered though by the continuation of the stay with the Supreme Court appeal."

In the decision, Parker wrote that the court believed "it is equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing.

"Because the district court's decision does no more than hold Argentina to its contractual obligation of equal treatment, we see no abuse of discretion," Parker added.

'Not About the Law'

Friday's ruling rejected Argentina's arguments that the order to pay the holdout bondholders would unjustly hurt itself, participants in the bond payment system and the public.

It also rejected a claim by bondholders who agreed to the restructuring that Griesa's ruling would prevent them from being paid, based on Argentina's refusal to pay the holdouts.

"This type of harm - harm threatened to third parties by a party subject to an injunction who avows not to obey it - does not make an otherwise lawful injunction 'inequitable,'" Parker wrote.

Sean O'Shea, a lawyer for a group of bondholders including Gramercy Funds Management LLC who participated in the debt restructuring, said the opinion "unfortunately glosses over" the impact on his clients.

But Theodore Olson, a lawyer for NML, one of the dissident hedge funds, said the ruling "confirms that Argentina is not above the law."

At times, Friday's ruling reflected seeming frustration of the court with Argentina.

Parker said that in light of the "unusual nature of this litigation," the court had invited Argentina to propose an alternative payment formula that it was willing to commit. Argentina put forward "no productive proposals," he wrote.

The opinion quoted Jonathan Blackman, Argentina's lawyer, as even telling the court during arguments that the country "would not voluntarily obey" Griesa's injunctions if they were upheld.

Next Stop: Supreme Court

Argentina has already sought Supreme Court review of a ruling by the 2nd Circuit in October last year that Argentina had broken a contractual obligation to treat bondholders equally. A footnote to Friday's ruling suggested that the Supreme Court justices may wait instead for an appeal from the more recent decision.

That would delay the high court taking action on the appeal, although it could still potentially decide the case by the end of the court's next term, which starts in October and runs until June 2014.

Resolution of the case could be delayed further if the justices ask the Obama administration to weigh on whether they should hear the case. Then, the court might not rule on the case, if it decides to hear it, until the term that starts in October 2014.

In Friday's ruling, the 2nd Circuit also said that New York's status as a financial center depended on enforcing the ruling.

"We believe that the interest - one widely shared in the financial community - in maintaining New York's status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts," Parker wrote.

The case is NML Capital Ltd et al v. Republic of Argentina, 2nd U.S. Circuit Court of Appeals, No. 12-105.

[Source: By Nate Raymond and Jonathan Stempel, Reuters, New York, 23Aug13]

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