DBRS Places Argentina’s “B” Ratings Under Review with Negative Implications

DBRS, Inc. (DBRS) has today placed its ratings of the Republic of Argentina’s long-term foreign and local currency securities Under Review with Negative Implications. The ratings for the Republic of Argentina’s foreign and local currency debt are at B.

This action reflects DBRS’s assessment that following a recent New York court ruling, there is greater uncertainty regarding Argentina’s willingness to meet its full debt obligations. This is because on October 26, 2012, the U.S. Court of Appeals for the Southern District of New York enjoined the Republic of Argentina from making payments on debt issued following the 2005 and 2010 debt restructurings, without also making comparable payments on a portion of its debt that remains in default. The court ruled that pari passu clauses, or equal treatment provisions, in the bond agreements bar Argentina from discriminating against payments of defaulted bonds held by plaintiffs, the largest of whom is NML Capital, Ltd., in favor of the restructured bonds. Argentina has objected to honoring the plaintiffs’ claim.

DBRS acknowledges Argentina’s willingness to stay current on its restructured bonds, as expressed recently by Economy Minister Hernán Lorenzino to the local Argentine press. However, the appellate ruling orders Argentina to pay US$1.33 billion to the plaintiffs, which is the amount of principal and interest that the plaintiffs claim that Argentina owes them. Furthermore, the injunction forbids Argentina’s agent banks located in New York from aiding or abetting any violation of the equal treatment provision that stipulates Argentina to honor restructured debt payments as well as the plaintiffs’ bond payments on an equal basis. This could considerably increase Argentina’s debt service burden.

However, the appeals court remanded the case to a district court to address the mechanics of the payment formula and the legal responsibilities assigned to third parties and intermediary banks. It is unclear how long the lower court will take. Nevertheless, the appellate court’s ruling stands. DBRS will maintain the ratings Under Review until there is greater clarity on Argentina’s stance with regard to its payments of both the restructured bonds and the plaintiffs’ bonds. The ratings could remain at their current level if full payment is made. Any delay or payment failure to current bond holders, however, would likely result in lower ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

The sources of information used for this rating include the NML Capital, Ltd. v. Republic of Argentina, United States Court of Appeals for the Second Circuit, Ministerio de Economía y Producción, BCRA, INDEC, IMF. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Fergus McCormick
Rating Committee Chair: Roger Lister
Initial Rating Date: 6 September 2007
Most Recent Rating Update: 5 October 2011

For additional information on this rating please refer to the linking document under Related Research.