By Matt Wirz And Christopher Whittall
A bid by two global banks to sell bonds for Argentina in London
collapsed, delivering a fresh setback to the cash-strapped South
American nation amid a long-running feud with creditors.
Deutsche Bank AG and J.P. Morgan Chase & Co. approached bond
fund managers on Wednesday to gauge interest in an auction of the
country's debt in London, people familiar with the matter said. The
banks believed they had found a way to sell Argentine bonds without
running afoul of a U.S. court ruling last year, the people
said.
The banks suspended the plans Thursday after legal action taken
by a group of creditors who have been battling with Argentina for
payment on defaulted bonds. Late Wednesday, the U.S. District Judge
in the case, Thomas Griesa, ordered an emergency hearing to discuss
the proposed London sale.
The sale would have been the first of its kind outside Argentina
since the country defaulted in 2001, and would have helped it
replenish dwindling foreign-currency reserves. It isn't clear
whether the banks had an official mandate from Argentina, which has
been fielding bond sale proposals from banks for over a year.
A spokeswoman for Argentina's Economy Ministry said the
government studies all debt-issuance proposals submitted to it that
in accordance with Argentine law.
The developments show that "Argentina will find it extremely
difficult to use international banks to help it raise funds and
will likely not be able to issue new local-law bonds to foreign
investors," said Jane Brauer, an emerging markets analyst at Bank
of America Corp.
Though short-lived, Argentina's latest attempt to borrow outside
its borders marks a new phase in the cat-and-mouse game it has been
playing with some creditors for years.
Judge Griesa ruled in June that Argentina cannot pay holders of
its restructured debt until it pays a group of hedge funds known
collectively as holdout creditors. They own bonds that Argentina
defaulted on in 2001 and are seeking repayment; they have refused
to participate in the country's 2005 and 2010 debt
restructurings.
The judge said anyone that helped Argentina pay other
bondholders would be in contempt of court. As a result, bond
trustees and payment-clearing firms have been reluctant to pass
along payments from Argentina to restructured bondholders. Analysts
said the ruling also would likely limit the participation of global
banks in Argentine bond sales.
Investors have snapped up Argentine bonds in recent months,
effectively wagering that Argentina will soon find a way around
last year's ruling by Judge Griesa or that the country will settle
with the holdout creditors after general elections scheduled for
October.
The yield of Argentina's dollar bonds that mature in 2024 has
fallen to 7.86% this week from 10.48% in December, according to
FactSet. Yields fall when prices rise.
A successful sale of new bonds in international markets would
give Argentina the upper hand in the long-running legal battle with
the holdouts, led by hedge funds Elliott Management Corp. and
Aurelius Capital Management LP.
Lawyers working for Deutsche Bank and J.P. Morgan crafted the
new bond sale in a way they thought would conform to Judge Griesa's
directives, according to people familiar with the matter.
On Wednesday the banks' salespeople approached fund managers to
gauge interest in a new bond to be issued in London through an
auction format, according to investors who received sales pitches.
The new debt would have been issued by reopening a pre-existing
bond governed by Argentine law rather than U.S. law.
Elliott first subpoenaed Deutsche Bank and J.P. Morgan about a
planned $2 billion bond sale for Argentina on Feb. 9 but they
failed to respond, prompting Judge Griesa this week to force them
to comply.
The banks are now in a holding pattern to see whether the judge
will agree that their plan doesn't violate his earlier ruling
blocking bond payments. No deal had officially been launched and
the plans were at an early stage, people familiar with the matter
said.
Elliott said through a spokesman Wednesday that it was
"dismayed" that Deutsche Bank and J.P. Morgan were participating in
the attempted deal.
Some of the investor optimism comes from lawsuits challenging
Judge Griesa's ruling filed in Belgium and the U.K. by other hedge
funds that in August held about EUR1.3 billion ($1.48 billion) of
euro-denominated bonds Argentina issued in exchange for bonds it
defaulted on over the past decade.
Argentina tried to pay at least EUR226 million on its
euro-denominated bonds last year but Bank of New York Mellon Corp.
and Euroclear PLC, the trustee and clearing house administering the
payments, refused to transfer the funds because of Judge Griesa's
order.
The hedge funds, including Knighthead Master Fund and George
Soros's Quantum Partners, won a victory on Feb. 13 when the London
Chancery Court ruled the bonds are governed by U.K. law and that
Bank of New York Mellon's obligations as trustee "are unaffected"
by the U.S. court decision. They are seeking a similar ruling for
Euroclear in Belgium, where the clearing house is based.
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