Argentina Proposal to Ignore a US Supreme Court Ruling Raises the Risk of Missing
Debt Payments
On Tuesday, Argentina (Caa1 stable) announced that it would not abide by a US Supreme Court decision
that would force the country to make payments to litigating holdout creditors. Instead, the country offered
a voluntary debt swap to change its current foreign legislation debt to Argentine law obligations.5
The
announcement is credit negative because it illustrates Argentina’s weak institutional framework and raises
the risk that the proposed debt swap will lead to missed debt payments.
Argentina’s announcement came a day after the Supreme Court denied the country’s petition for a review
of a US Appeals Court ruling that allowed holdout creditors to be paid in full, based on the pari passu
clause included in bond contracts. In a parallel case, the Supreme Court on the same day ruled against
Argentina in an appeal case granting holdout creditors the right to receive information about Argentine
foreign assets from two financial institutions. The Supreme Court determination is the final step in a series
of court battles between Argentina and creditors that did not participate in the country’s 2005 and 2010
debt restructurings.
As it now stands, the court ruling holds that Argentina must comply with the pari passu or equal treatment
clause in its bond contracts and cannot discriminate against the holdout bonds in favor of the bonds issued
in the 2005 and 2010 sovereign debt restructurings. Furthermore, the Argentine government must pay
litigating bondholders concurrently with any payments to holders of its restructured debt and in full (i.e.,
100% of accelerated principal and accrued interest). The paying agent on the restructured bonds, The Bank
of New York, is subject to the injunction, meaning that funds remitted to The Bank of New York for
payment on the restructured bonds are potentially available for payment to the holdout creditors.
The ruling risks affecting the coupon payments on restructured Argentinean debt. Restructured
bondholders that participated in the 2005 and 2010 debt restructurings constitute 93% of the original debt
in default, while holdout creditors account for the remaining 7%. The original litigating claims total $1.3
billion, but could grow to nearly $7.5 billion if only New York law claims benefit, or to nearly $12 billion if
all holdout claims in US dollars and euros can leverage the legal precedent.
The implications of the court ruling will hinge on Argentina’s policy response. In our opinion, these latest
developments have narrowed the possible outcomes to two equally likely scenarios. The first is that
Argentina carries out the proposed debt swap, which would likely lead to default and at least a temporary
interruption of payments to restructured bondholders.
The second scenario is that although the government has announced a new debt swap, the government
instead tries to negotiate a judicial settlement. Argentina’s next bond payment on restructured bonds is due
30 June. A settlement with litigating bondholders that results in no interruption of payments to
bondholders would be positive for both the restructured debt and the debt still in default, which we
currently rate Ca, and build on the government’s recent efforts to normalize relations with foreign
creditors.6