Hedge funds Sue BONY for Unpaid Argentinian Bonds

Hedge funds holding €1.3 billion ($1.71 billion) of Argentine government bonds filed suit against the U.S. bank charged with overseeing payments to the nation’s bond investors

Hedge funds include Knighthead Master Fund LP, RGY International LLC, which is a unit of Perry Capital, as well as Kyle Bass’s Hayman Capital Master Fund LP and George Soros’s Quantum Partners LP.

kyle-bassA group of hedge funds holding €1.3 billion ($1.71 billion) of Argentine government bonds has filed suit against the U.S. bank charged with overseeing payments to the nation’s bond investors, seeking to gain access to interest payments they are owed.

The suit, filed in London’s Chancery Court, names as defendant Bank of New York Mellon Corp. BK +0.89%  The suit opens up a new front in the decade long war between Argentina and investors including so-called holdout creditors that are seeking payment on bonds the country defaulted on in 2001.

The plaintiffs include Knighthead Master Fund LP, RGY International LLC, which is a unit of Perry Capital, as well as Kyle Bass‘s Hayman Capital Master Fund LP and George Soros‘s Quantum Partners LP, according to a copy of the suit.

Bank of New York’s “actions have been designed consistently to protect its own interests without reference to the interests” of the bondholders, the suit alleges.

Argentina defaulted last month when investors didn’t receive $539 million in interest payments due on July 30.

Argentina deposited the money on time, but U.S. District Judge Thomas Griesa blocked its distribution to bondholders after Argentina ignored his ruling to pay a small group of hedge funds that sued to collect on debt the country repudiated 13 years ago. That left the money on deposit at the bank.

A spokesman for BNY Mellon declined to comment on the suit. “We will continue to comply with the court order,” he said.

The plaintiffs asked the English court to order Bank of New York to pay out the €226 million Argentina deposited for its euro-denominated bonds, arguing that their bonds are governed by English law, not New York law, and aren’t subject to the injunction.

The exchange bondholders have already asked Judge Griesa to exempt the euro-denominated bonds from his injunction. Their strategy is to increase pressure on the U.S. judge by obtaining a ruling in London, a person familiar with the matter said.

The default could eventually affect almost $29 billion in Argentine debt issued overseas. The news was reported Monday by Bloomberg News.

Last month’s default stems from Argentina’s decision to repudiate about $100 billion in debt during a deep economic crisis in 2001. Investors eventually exchanged almost 93% of their defaulted bonds for new securities in restructuring in 2005 and 2010 that gave them around 33 cents on the dollar.

Creditors led by Elliott Management Corp.’s NML Capital Ltd. and Aurelius Capital Management LP held out for a better deal and sued for full payment. NML and Aurelius, known as the holdout creditors, have won about $1.6 billion after years of litigation.

Judge Griesa said in June that anyone who attempted to help Argentina make the payment would be in contempt of court. The holdouts have asked the judge to order BNY Mellon to return the funds to Argentina.

Last week, Argentina moved to circumvent the U.S. court order by offering a bond swap that would let it pay bondholders in Argentina instead of in the U.S. The offer would allow bondholders to swap bonds issued under foreign law for bonds issued under Argentine law, according to a copy of the bill.

If approved by Argentina’s Congress, the bill would enable the government to deposit payments on the new Argentine bonds in an account at the central bank. The government would also replace Bank of New York Mellon as trustee with state-run bank Banco de la Nacion or a trustee approved by bondholders.

BNY Mellon has been sued in Belgium by a group of euro bondholders demanding their interest payment. The same group of euro bondholders is threatening to file a suit in U.K. courts if BNY Mellon returns the money to Argentina.

Argentina has also threatened to sue BNY Mellon, arguing that the bank is breaking its trustee contract by not sending the interest payment onto bondholders.

“Nearly economic stakeholder in this litigation has either sued or threatened to sue,” the bank said in a letter filed with the U.S. District Court last month.

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