No brainer

29 October 2012 By Reynolds Holding

The nation exploited fuzzy language to stiff debt-swap holdouts. As Breakingviews predicted, a U.S. court ordered it to pay up, saying a promise to treat creditors equally is plenty clear. Rather than spark market chaos, the ruling sends the message that deal terms have teeth.

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The U.S. Court of Appeals in New York on Oct. 26 upheld an order blocking Argentina from paying bondholders without also paying NML Capital, an affiliate of New York-based hedge fund Elliott Associates, and other investors in defaulted bonds.

The case involves Argentina’s 2005 offer to exchange $95 billion in defaulted debt for new bonds worth 30 cents on the dollar. NML and other holders of about $20 billion of the debt rejected the offer, and in 2010 NML spurned a second restructuring that exchanged $12.9 billion of the remaining $20 billion for new bonds. About 92 percent of the original debt has been swapped out. Argentina has not made payments on the NML bonds since 2001.

The three-judge appellate panel ruled that Argentina’s official actions, including a law prohibiting payment on the hedge fund’s debt, violated the bonds’ so-called pari passu provision, which requires equal treatment for all of the debt.

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