J. F. Hornbeck
Specialist in International Trade and Finance
In December 2001, following an extended period of economic and political instability, Argentina suffered a severe financial crisis, leading to the largest default on sovereign debt in history. It was widely recognized that Argentina faced an untenable debt situation that was in need of restructuring. In 2005, after prolonged, contentious, and unsuccessful attempts to find a mutually acceptable solution with its creditors, Argentina abandoned the negotiation process and made a one-time unilateral offer on terms highly unfavorable to the creditors. Although 76% of creditors accepted the offer, a diverse group of “holdouts” opted instead for litigation in hopes of achieving a better settlement in the future. Although Argentina succeeded in reducing much of its sovereign debt, its unorthodox methods left it ostracized from international credit markets for a decade and triggered legislative action and sanctions in the United States.
Argentina owed private creditors $20 billion in defaulted debt and $10 billion in past-due interest, as well as $6.2 billion to Paris Club countries. Of the disputed privately held debt, U.S. investors had approximately $3 billion. The more activist investor groups have lobbied Congress to pressure Argentina to reopen debt negotiations. Some Members of Congress have introduced punitive legislation in both the 110th and 111th Congress, but to date it has not received any legislative action. Nearly five years after the original debt workout, however, a confluence of circumstances persuaded Argentina to restructure the holdout debt, particularly the need to secure long-term public financing.
On April 30, 2010, Argentina announced a new $18.3 billion offer to exchange new bonds and cash for defaulted bonds held by the “holdouts.” The exchange ran from May 3 to June 22, 2010. Two distinct offers were made, one for retail (small) investors, the other for institutional (large) investors. At settlement on August 2, 2010, retail investors received replacement bonds for the full face value of the defaulted bonds they held. Past due interest was paid in cash. Institutional investors received a discount bond equal to a 66.3% reduction in the face value of the defaulted debt they held. Past due interest was covered by a separate seven-year “Global” bond. Interest rates vary depending on the bond. Both groups of investors received a GDP-linked security called a warrant that provides for additional payments should the Argentine economy grow at rates higher that anticipated and stipulated in the prospectus.
The 2010 offer drew sufficient support to retire most of the remaining defaulted debt. Analysts estimate 66% of bondholders participated, leading to a total participation rate of 92% for the 2001 default, if the 76% tendered in the 2005 workout is included. Historically, a greater than 90% threshold of participation has allowed countries to eventually return to the international capital markets. So far, this has not been the case for Argentina. The $6.2 billion of bonds not exchanged are held largely by a group of Italian retail investors and various institutional “vulture” funds, which continue to litigate. Court reactions to these holdouts are not easy to predict, but technically any judgments against Argentina remain in place. It remains to be seen, and opinions vary, as to whether Argentina will be able to address these bondholders in some way that will allow for a return to the international capital markets in the near future.
If there is a legacy to the Argentine case, it may be in the changes to bond contracts that seek to improve outcomes for creditors. One option is the use of collective action clauses (CACs), now standard for sovereign debt, which require all creditors to bargain collectively, with a compulsory majority decision applicable to all bondholders. It is no coincidence that both the 2005 and 2010 Argentine exchanges are governed by CACs. .
Date of Report: September 24, 2010
Number of Pages: 19
Order Number: R41029
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