Hedge Funds sue for $539 million in interest

Screen-Shot-2014-09-15-at-15.03.05 Hedge Funds sue for $539 million in interest

In May, Argentina’s Economy Minister met with officials of the Paris Club to sign the largest sovereign debt restructuring agreement in history. After defaulting on close to $100 billion in debt in 2001, Argentina suffered from lack of access to international financing, and the Paris Club deal gave them some badly needed debt relief. But while most investors had exchanged about 93% of their defaulted bonds for new securities—per 2005 and 2010 restructurings that gave bondholders 33 cents on the dollar—some hedge fund bondholders held out for a better deal. Now the “holdout bondholders” are suing to recover $539 million in interest payments stemming from the 2001 default, which were due in July.

U.S. Judge Blocks Distributions

A New York bank serving as trustee for $1.5 billion in claims by bondholders against Argentina was ordered by a U.S. District Court judge earlier this month to retain bondholder funds that had been deposited by Argentina. Included in those funds was the $539 million in interest due on July 30. Argentina deposited the money on June 26, but the judge ordered that funds not be released because Argentina had ignored his earlier ruling to pay the holdout U.S. hedge funds before paying its overseas debt. Notwithstanding the fact that the bank is holding on to the interest payment funds as per the order of court, one hedge fund manager placed the blame squarely on the bank, alleging, “They failed to transfer the euro funds in accordance with their trust obligations.”

Plaintiffs Assert UK Jurisdiction

Last week, the group of hedge funds—collectively holding $1.71 billion of Argentine government bonds—filed suit in London’s Chancery Court against the New York bank claiming the bank’s “actions have been designed consistently to protect its own interests without reference to the interests” of the bondholders. They seek an order from the English court directing the New York bank to pay out 226 million euros ($298 million) reflecting the value of the euro-denominated bonds. Jurisdiction is predicated upon the notion that such bonds are governed by English law, not U.S. law, and that therefore they are not subject to the U.S. judge’s injunction.

Argentina’s Response: Boots Bank

In response to the hedge funds’ UK lawsuit, Argentina’s Central Bank has revoked the New York bank’s authority to conduct business in Argentina. They are also threatening to sue the New York bank on the grounds of alleged breach of trustee agreement for not remitting the interest payment onto bondholders.

The tenacity of the holdout bondholders has paid off for them in the past: in the 13 years since the original default, they have won about $1.6 billion by way of litigation.