Argentina offers vulture funds a settlement with an average 1,000% return; only two of six accept.
The Argentine Economy Ministry announced that after five days of talks in New York, its representatives presented a formal proposal to settle vulture fund holdout bondholder demands. The offer amounts to $6.5 billion in cash, for an average reduction of 25% from the payout Lower Manhattan District Court Judge Thomas Griesa awarded six vulture funds and a number of retail holdouts. The offer is equal to 2.6 times the bonds' current market value of around US$2.5 billion, and implies an average yield of around 1,000%.
The financial terms of the deal were quickly accepted by some of the most aggressive litigants, such as Swiss-based Montreux Capital and U.S. tax exile Kenneth Dart's Dart Management. But the two principal vulture fund holdouts, Paul Singer's Cayman Islands-based Elliott Management (EML) and the London-based Aurelius Management, have yet to approve the offer.
The generosity of the offer was greeted with enthusiasm exhibited by Daniel Pollack, the mediator imposed by the Greasa court, who called President Mauricio Macri and Finance Minister Alfonso Prat-Gay to downplay the reluctance of some creditors. The offer, however, is contingent on Congressional passage of an amendment of the Padlock Law, legislation signed by former President Néstor Kirchner that forbids giving holdout bondholders privileged terms over those who accepted Argentina's bond swaps (92.4% did). These bondholders' payments remain blocked in escrow since July 2014 by order of the Griesa court at the behest of vulture fund litigants.
This offer comes days after a preliminary agreement with Italian holdouts for US$1.35 billion, or 150% of their bonds' face value. Holdouts represent just 5% of Italian holders of Argentine bonds, and are part of the 92.4% overall whose payments are still blocked. Combined, the two offers will cost Argentina an estimated US$8.1 billion in cash and thus force Finance Minister Prat-Gay to seek foreign borrowing by way of new, high interest-rate government bonds.
The Macri administration's holdout negotiators, led by Finance Secretary Luis Caputo, justified the offer by pointing out that it would cover two-thirds of the 7.6% of bondholders that had rejected the 2005 and 2010 swaps (the holdouts). The arrangement, they claim, is essential to fully reintegrate the country into the international financial system and thus facilitate Argentina's return to global bond markets. The lack of access to bond markets has helped result in relatively low levels of foreign indebtedness for Argentina (25% of GDP, of which less than half is public debt), and this will likewise facilitate foreign borrowing should this settlement succeed.
The offer, as noted, has yet to be accepted by the two principal holdout litigants, EML and Aurelius, and would not necessarily preclude other holdouts from using the Griesa court to initiate new litigation and thus continue to block most of Argentina's foreign bondholders - even as these six vulture funds and other holdouts collect outsized payouts from this deal. Nor does it guarantee that many of the 92.4% blocked by Griesa and left out by this offer will not sue for terms similar to those of vulture funds and find a judge willing to accommodate them.
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