By Katia Porzecanski

     Aug. 30 (Bloomberg) — Argentina’s plan to swap overseas investors into bonds issued under local law to ensure payments aren’t disrupted by a U.S. court order is making euro- denominated debt more attractive.

     Euro notes due 2033, issued in the nation’s first bond restructuring under English legislation, now yield 0.85 percentage point less than similar-maturity dollar debt governed by New York state law, the biggest difference since June 18. The discount deepened after the U.S. Appeals Court of New York on Aug. 23 ruled against Argentina in its legal dispute with creditors suing for full repayment from its 2001 default.

     While the euro bonds were included in the ruling that prohibits Argentina from paying any of its restructured notes until the holdouts are compensated, investors such as New York- based hedge fund Perry Capital LLC can appeal to European courts to protect their coupon payments, according to BancTrust amp; Co.

Semi-annual interest on the 2.3 billion euros of so-called discount notes, which at 14.7 percent yield more than twice the emerging-market average, is scheduled to be paid on Dec. 31.

     “You have three legislations, Argie, New York, and U.K., and U.K. is the best one right now — not because you’re fully protected, but because you’re the most protected,” Hernan Yellati, head strategist at BancTrust, said in a telephone interview from Miami.

Debt Swap

     President Cristina Fernandez de Kirchner on Aug. 26 offered to open a debt swap on the same terms as its two prior restructurings in 2005 and 2010 and to eventually allow holders of restructured bonds to switch into bonds protected by Argentine law to guarantee payments.

     Until it does, Argentina can’t make full payments on any security issued in the two restructurings, regardless of the jurisdiction protecting the note, the three-judge panel said.

The effects of the order are delayed until the Supreme Court decides whether to review the case.

     Argentina has about $16 billion in euro bonds from its debt swaps, which account for about 46 percent of the nation’s foreign-currency restructured debt, according to data from the Economy Ministry.

     While the orders only directly bind the actions of Argentina, other parties, including firms responsible for transferring money to investors, are forbidden from assisting.

‘Active Concert’

      Argentina deposits the creditors’ euro bond payments in a local account of Bank of New York Mellon Corp., which transfers the money to an account in Germany at Deutsche Bank AG in the name of Bank of New York Mellon (Luxembourg) SA, a Belgian subsidiary. The funds are then distributed to investors through clearinghouses, including Brussels-based Euroclear Bank SA.

     “If others in active concert or participation with Argentina are outside the jurisdiction or reach of the district court, they may assert as much if and when they are summoned to that court for having assisted Argentina in violating United States Law,” the judges wrote.

     The ruling recognizes that it would be more difficult to enforce violations by parties outside the U.S., Jeff Williams, a strategist at Citigroup Inc., said in an Aug. 26 report.
     European courts usually enforce U.S. judgments unless they find a party is outside the reach of the U.S. court or if it hasn’t been given due process, according to Gilles Cuniberti, a professor of international and comparative law at the University of Luxembourg. The courts may then decide to litigate the merits of the case based on local law, he said.

 Nicaraguan Bonds

     Euroclear, the world’s biggest settlement system, has said the orders would be in violation of Belgian law, which prohibits the obstruction of cash transfers made by settlement agents. The law was established in 2004 after an appeals court in Brussels overturned a lower-court order that had prevented Euroclear from accepting or making any payments on Nicaraguan bonds at the request of holdout creditors.

     Holders of Argentina’s euro bonds, including Knighthead Capital Management LLC, are suing Bank of New York Mellon Brussels and Euroclear in Belgian court. They seek a permanent order requiring the intermediaries pass along payments and a declaration that the U.S. court ruling is unenforceable against those entities. A hearing is set for Sept. 5.

     While a European-based entity that’s been sanctioned in the U.S. for contempt may be able to avoid the enforcement of that sanction abroad, any assets it has in the U.S. could be seized, said Cuniberti.

‘Economic Suicide’

     “There is no bank that has any presence in the United States that would be willing to slap the court in the face,”

Jim Craige, who helps oversee $61 billion at Stone Harbor Investment Partners LP, said in a telephone interview from New York. “That’s economic suicide.”

     The implied probability of default in the next five years based on trading in credit-default swaps is 84 percent. The upfront cost to protect against an Argentine non-payment with CDS has jumped 7.9 percentage points since the appeal was rejected to 53.3 percent at 10 a.m. in New York, according to data compiled by CMA.

     Most of the investors in euro-denominated paper are funds that specialize in distressed debt and who are knowledgeable about the case and prepared for volatility, Sebastian Vargas, an economist at Barclays Plc, said in a telephone interview.

     “The credit is in strong hands,” he said.


To contact the reporter on this story:

Katia Porzecanski in New York at +1-212-617-0408 or

To contact the editors responsible for this story:

David Papadopoulos at +1-212-617-5105 or; Michael Tsang at +1-212-617-3277 or