Search Penny Hill Press

Sunday, January 24, 2010

Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

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 them 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 have left it ostracized from international credit markets for nearly a decade and triggered legislative action and sanctions in the United States. 

Argentina still owes 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 hold approximately $3.0 billion. Some of the more vocal 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 has persuaded Argentina to restructure the holdout debt, particularly the need to secure long-term public financing. 

On December 16, 2009, Argentina filed a registration statement and prospectus to issue $15 billion in bonds, the proceeds of which will be used to finance an exchange of defaulted debt. The terms of exchange were not included and are not expected until late January 2010. Some analyses speculate that the structure of the new exchange will be similar to the one offered in 2005, which would entail a discount of 65% from the face value of the bonds, with past due interest capitalized and financed separately. Given that Argentine law prohibits the new exchange from offering better terms than the 2005 offer, and that bondholders who participated in that exchange benefitted from additional payments based on Argentina's strong economic growth, it appears likely that the new offer will be the less favorable of the two. 

For Argentina, a successful restructuring requires a sufficiently large participation rate for the courts to set aside existing judgments and attachment orders. This action would allow Argentina renewed access to the international credit markets. Historically, sovereign debt workouts with at least a 90% participation rate have achieved this goal. Since holdouts compose 24% of the original bondholders, a 60% participation rate of this group would allow for the total participation rate to reach the 90% threshold. If the exchange succeeds, Argentina will have completed a debt restructuring with the deepest write-off of principal in history. The original bondholders were severely hurt by this deal, but so was Argentina by the crisis. It appears that nothing can be done for the original investors who have traded their bonds. 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 collective action clauses (CACs) in bonds, which require all creditors to bargain collectively, with a compulsory majority decision applicable to all bondholders. This provision may allow for more coordinated creditor responses, which could increase their bargaining leverage, allow for more equitable treatment of all bondholders, and lead to a far quicker resolution to any future sovereign default.

Date of Report: January 21, 2010
Number of Pages: 15
Order Number: R41029
Price: $29.95

Document available electronically as a pdf file or in paper form.
To order, e-mail or call us at 301-253-0881.