A U.S. appeals court ordered Argentina on Friday to provide "precise terms" for any alternative payment formula it would commit to that would resolve litigation with holders of defaulted bonds seeking to be paid $1.3-billion (U.S.).
The 2nd U.S. Circuit Court of Appeals in New York entered the order two days after hearing oral arguments in the dispute. The court gave Argentina until March 29 to submit a formula and a timetable for carrying it out.
In the unsigned order, the court said Argentina at oral argument "appeared to propose" it was willing to abide by a different payment formula than the one ordered by U.S. District Judge Thomas Griesa in Manhattan.
Friday's ruling, while forcing Argentina to articulate its position, provides it an opportunity to open a negotiation with so-called holdout investors who own defaulted debt from the country's 2002 financial meltdown. That is something Argentina has so far not believed to have done. Sources familiar with the thinking of lead holdout investor Elliott Management say the hedge fund, with some $20.7-billion in assets, is willing to talk.
The cost to insure Argentina's restructured sovereign debt fell after Friday's ruling, in a sign the chance of dialogue eased fears Argentina could be heading for its second massive default in 11 years.
Judge Griesa in November ordered Argentina to pay into escrow the full $1.33-billion owed to the holdout bondholders, led by Elliott Management affiliate NML Capital Ltd. and Aurelius Capital Management. Argentina calls them vultures.
The $1.33-billion payment was due the next time Argentina made an interest payment to bondholders who participated in the country's 2005 and 2010 exchanges. About 92 per cent of its bonds were restructured in 2005 and 2010, giving holders 25 cents to 29 cents on the dollar.
Judge Griesa's February 2012 order, upheld on appeal, 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.
Argentina has said it cannot abide by the court order to pay the holdouts, thereby significantly increasing the chances for a second massive default, this time on the $24-billion worth of restructured bonds.
Argentine President Cristina Fernandez quickly responded to the 2nd Circuit's latest directive, stating the government is willing to pay the holdouts, but only if they accepted the same terms as the prior two exchanges.
"We are willing to pay the vulture funds, but not in better conditions than the 93 per cent (of restructured debt) that had faith and took a chance on Argentina," Ms. Fernandez told Congress Friday in her state of the union address.
In its order Friday, the 2nd Circuit said that Argentina must in its written response indicate how and when it would make current obligations on the defaulted bonds, which have gone unpaid since Argentina's default in 2002.
The submission must also detail the rate Argentina proposed to pay on the defaulted bonds.
The court also asked for "what assurances, if any, it can provide that the official government action necessary to implement its proposal will be taken, and the timetable for such action."
Argentina has been adamant never to pay the holdouts a cent on their defaulted debt. But it has said it would be willing to ask Congress to suspend the so-called Lock Law and reopen the swap, letting holdouts be paid under the same terms offered in the 2010 debt exchange.
On Wednesday, the court asked Argentina's lawyer, Jonathan Blackman, what a potential ratable payment might entail.
He responded it required taking the coupon on the unrestructured debt and applying it to the amount held by the holdout investors.
"And we would be more than happy to go back to the district court if you were to go back and work out that math, which is one of the things we would have done had we had more time to do it last November," Mr. Blackman said, according to an unofficial transcript of the proceedings obtained by Reuters.
Mr. Blackman said, according to the transcript: "We didn't have that opportunity. But that is what Argentina wants very much to do. … What we don't want to have happen is a situation where nobody benefits."
In the aftermath of the tough questions Argentina faced from some of the judges in the oral arguments, the market's take on the proceedings was to bid higher, significantly, the price investors need to pay to insure their Argentine debt from default or restructuring.
The cost to insure its restructured sovereign debt surged nearly 1,000 basis points following Wednesday's oral arguments, flirting with nearly 3,000 basis points, or close to $3-million annually for five years for every $10-million of debt held in a portfolio, according to data provider Markit.
In the immediate aftermath of the court's newest order seeking a proposal from Argentina "to make current" the holdout investors, CDS prices fell approximately 368 basis points.
Representatives for Elliott's NML and Aurelius declined to comment on the court's ruling. A lawyer for Argentina did not respond to an e-mail seeking comment.