Argentina plans to offer suing holdout creditors a 25-year bond equal to the face value of their debt when the country defaulted in 2002, local financial daily Ambito Financiero reported on Wednesday.
The country faces a Friday deadline to respond to a US appeals court order that it provide an alternative payment formula to resolve litigation with creditors seeking to be paid 1.33 billion in capital and interest on defaulted bonds.
The government of President Cristina Fernandez which calls hedge funds ‘vulture funds’, has said it cannot offer the holdouts more than what was received by bondholders, who entered debt swaps in 2005 and 2010, must submit a formula and a timetable for carrying it out this week.
If the court does not accept the proposal, investors fear Argentina could default on 24 billion in restructured debt.
Ambito Financiero's report on Wednesday said the government's offer would propose giving the holdouts Par bonds equal in value to the bonds they have sued over at the time of the world's biggest sovereign default.
The newspaper said that would be equivalent to about 450 million dollars in 2038 Par bonds.
Holdouts would be offered Discount bonds, which carry a steep haircut, in exchange for the rest of the money demanded by the creditors in accumulated unpaid interest.
In the 2010 swap, the terms of which Argentina says, by law, it cannot improve for the holdouts, a Discount bond maturing in 2033 and representing 33.7% of the face value of the defaulted debt was offered to institutional investors.
Par bonds for the full face value were also offered in the exchange three years ago, but only to small-scale investors wanting to tender a maximum of 50,000 dollars or 40,000 Euros in bonds.
Investors are closely watching the case, which is led by Elliott Management affiliate NML Capital Ltd and Aurelius Capital Management, because it has raised fears of a default on the restructured debt that was issued during the debt swaps.
Concerns ballooned after US Judge Thomas Griesa ordered Argentina in November to pay into escrow the full 1.33 billion owed to the holdouts, an order Argentina immediately appealed.
Griesa's payment order followed his February 2012 ruling, upheld on appeal, which found Argentina violated the equal treatment provision in the bond contract known as pari passu. His order is meant to block any payment to exchange bondholders if full payment is not also given to the holdouts.
Argentina has said it cannot abide by the court order to pay the holdouts in full, meaning a rejection of the payment proposal it submits this week would increase the chances for a default on the restructured bonds.
A decision by the 2nd U.S. Circuit Court of Appeals on Tuesday to deny Argentina's request for a rehearing on the underlying issues in this case hit the country's asset prices on Wednesday.
The development is a negative event for Argentine sovereign credit as it suggests little sympathy from the court to the arguments Argentina uses in its defence against holdout creditors in the 'pari passu' litigation, J.P.Morgan said in a briefing note to clients.
The timing of the decision to deny rehearing can be interpreted as a warning from the court, it said.