Griesa lets Citigroup make US$5M payment

Had warned it could face regulatory and criminal sanctions if it failed to service bonds

US District Judge Thomas Griesa yesterday ruled that he would allow Citigroup to process a disputed US$5 million payment by Argentina on bonds issued under its local laws following the historic 2002 default on a one-time basis only.

Griesa agreed to an order proposed by bondholders suing Argentina over defaulted debt to allow Citigroup to process the interest payment, which is due September 30.

The ruling gave temporary relief to Citigroup, which has said it faces regulatory and criminal sanctions by Argentina if it cannot process the interest payment on US dollar-denominated bonds issued under Argentine law following the country’s 2002 default. These bonds had also been subject to embargoes despite not being under US jurisdiction.

For the time being, Citigroup will be able to comply with Argentine law and thus keep its privileges to operate in the country. One of its counterparts, the Bank of New York (BoNY) has had its privileges revoked for failing to process Argentine debt payments.

Griesa “did not dare to take a definitive decision but acknowledged that the bonds are not affected by the pari passu orders,” the Economy Ministry said late last night.

The judge’s orders “are unfair and impossible to fulfill,” the ministry added.

Possible long-term stay

The bondholders that consented to the stay include Elliott Management’s NML Capital Ltd and Aurelius Capital Management, both of which did not participate in Argentina’s past restructuring processes.

With the deadline looming, the holdout bondholders proposed allowing the payment to go through by issuing a stay that would allow litigation until the next payment is due on December 31.

“The reason plaintiffs have proposed a stay is so that the parties and Your Honour will not have to deal with these important issues on an emergency basis,” Edward Friedman, a lawyer for Aurelius, said.

Citigroup’s lawyer, Karen Wagner, pushed Griesa to go even further and rule that the bank was not subject to an injunction for any future, after the judge said his prior order favouring the creditors was focused on bonds “payable in New York and governed by New York law.”

Griesa ultimately declined to rule on that matter yesterday, instead giving the parties 30 days to exchange information in order to resolve the issue promptly.

“‘We do not want to be back here over and over when interest payments are due,” he said.

String of hearings

The hearing was the latest in a series of proceedings following Argentina’s refusal to honour court orders to pay US$1.33 billion plus interest to the holdout bondholders. The country has argued that do so would violate both domestic legislation as well at the RUFO (rights upon future offers) clause contained in restructured bonds, resulting in a potential cascade of “me-too” litigation worth multiple times more than what Griesa awarded to the holdouts.

In the meantime, June payments made by Argentina to restructured bondholders have failed to make it to their destination as they have been subject to embargoes by Griesa’s court, who has interpreted that Argentina’s creditors — both holdout and restructured — must receive debt servicing payments simultaneously.

The hedge funds had spurned the country’s 2005 and 2010 debt swaps, which resulted in exchanges for about 92 percent of the country’s defaulted debt for a fraction of their face value.

A July 30 deadline for the restructured bondholders to get their money came and went after the US Supreme Court declined to hear Argentina’s appeal of a ruling by Griesa that it must pay the holdouts when it paid holders of the exchanged bonds.

Griesa subsequently blocked Bank of New York Mellon Corp from processing the June US$539 million interest payment, sending Argentina on a collision course after no settlement was reached.

Amid the litigation, Citigroup sought assurances it could process payments it received from Argentina on bonds issued under Argentine law.

Griesa initially ruled for Citigroup. But on July 28, he rescinded the order, only allowing the bank to make a one-time payment due July 30.

To circumvent the legal embargoes placed on Argentine funds in New York, Argentina has taken steps to re-route its future debt payments through fiduciary agents in Buenos Aires, France or a suitable third location. That decision received legislative backing but has left open questions about how such a payment would be implemented with statutory limitations obliging that many restructured bondholders must comply with.

At least for the payments scheduled to go through the Citigroup on September, that alternative mechanism will not need to be employed.

Another hearing is scheduled Monday, when Griesa will weigh holding Argentina in contempt and ordering sanctions of US$50,000 per day for not complying with his orders.

Herald staff with Reuters

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