It's open season on Argentina among hedge funds.
The country suffered a huge court defeat in its ongoing battle with Elliott Associates over its 2001 default. Meanwhile, Elliott's hedge fund peers are, in effect, quietly calling Argentina's bluff on the Falkland Islands, which the country claims but which have been in British hands for almost 180 years.
Last week, in a ruling that could cost Argentina more than $1 billion, the federal appeals court in New York upheld a lower-court ruling that bars Argentina from paying bondholders who accepted its exchanges for the defaulted debt before those who, like Elliott affiliate NML Capital and Aurelius Capital Management, refused to take the haircut.
"We hold that an equal treatment provision in the bond bars Argentina from discriminating against plaintiffs' bonds in favor of bonds issued in connection with the restructurings and that Argentina violated that provision by ranking its payment obligations on the defaulted debt below its obligations to the holders of the restructured debt," the U.S. Second Circuit Court of Appeals wrote.
Argentina has vowed to appeal the decision, which came as something of a surprise, to the U.S. Supreme Court. The Obama administration had favored Argentina's claim, arguing that a victory for the hedge funds "could enable a single creditor to thwart the implementation of an internationally-supported restructuring plan."
But in a sweeping ruling for Elliott, which could force Argentina to default on the restructured bond, the Second Circuit rejected Argentina's arguments on the pari passu clause in the debt agreements.
"Argentina's selective recitation of context-specific quotations from arguably biased commentators and institutions notwithstanding, the preferred construction of pari passu clauses in the sovereign debt contest is far from 'general, uniform and unvarying,'" the court ruled. The lower court ruling does "not attach, arrest, or execute upon any property. They direct Argentina to comply with its contractual obligations not to alter the rank of its payment obligations."
NML and Aurelius own a combined $1.4 billion in defaulted debt. The ruling could be worth much more to the hedge funds, $1 billion, than the Argentine naval ship they seized last month in Ghana, which is thought to be worth less than 1% of that figure.
Meanwhile, other hedge funds, including Blackfish Capital, Lansdowne Partners and Odey Asset Management are wading into the centuries-old dispute between the British and Argentines over the Falklands, or, as the Argentines call them, Las Malvinas. The hedge funds are investing in several oil exploration firms operating off of the island chain, which was the subject of brief war between the two countries in 1982 and of recently escalating diplomatic tensions between them.
Argentina has threatened legal action against oil companies seeking to operate off the Falklands under British aegis. But the threat does not appear to be scaring anyone away, least of all the hedge funds, Reuters reports.
"It has been de-risked politically from the perspective of other interested parties now joining the activities down there," Edison Investment Research's Ian McLelland told Reuters.