Seeking Alpha
Long/short equity, tech, large-cap, energy
Profile| Send Message|
( followers)  

Summary

  • Argentinean investors have found themselves in a bit of a fix after the country has defaulted on payments worth $539 million to its bondholders.
  • BNY Mellon continues to face pressure from a number of hedge funds who invested in Argentine bonds.
  • Citigroup Inc is in line to make it as another potential target of this dispute between the Argentine government and its bondholders.

Argentinean investors have found themselves in a bit of a fix after the country has defaulted on payments worth $539 million to its bondholders. The last default by the country took place 13 years ago in the month of July, and was worth $100 billion. That was termed as one of the largest sovereign defaults in history.

The Argentinean President, Christina Fernandez, denied the default by the government saying that the $539 million payments had been disbursed by the country to The Bank of New York (NYSE:BNY) Mellon four days before the payment was due. BNY Mellon was acting as the trustee bank on behalf of the country for the bondholders.

Recalling History

The original default in the country, which took place in 2001, was due to Argentine bonds being restructured. Several firms were against the restructuring of the bonds that was to take place in two phases in 2005 and 2010, and continued to demand payments for their investments. Matters were taken to court, where some investors continued to demand payments in order to recoup their investments. Two of these investor groups were Aurelius Capital Management and NML Capital Fund. These two groups won the lawsuit against the country and in 2012 the U.S. court concluded that the government of Argentina owed the firms $1.3 billion.

While the ruling of 2012 is still being reviewed by the Supreme Court, a ruling passed by the U.S. District Judge stated that payments could not be transferred to Argentine bondholders till the government of the country could repay the money that it owes to creditors from the default in 2001. Following the orders of this ruling, BNY Mellon continues to face immense pressure from bondholders for their payments, but the bank confirms that it will follow orders that were passed by the court and would not transfer the payments until the Argentine government paid off all of its debt to the creditors of the 2001 default.

Argentine Reacts

Due to the funds not being transferred, the government has taken the matter to the International Court of Justice, where it has sued the United States for violating its sovereignty. The International Court of Justice refused to take any action until the United States would agree to the jurisdiction of the court.

BNY Mellon Taking The Hit?

During this entire fiasco, BNY Mellon continues to face pressure from a number of hedge funds who invested in Argentine bonds. Last week, a group of hedge funds also filed a lawsuit against the bank in London, while several other suits have been filed against the bank in Belgium, demanding that the bank be punished for not releasing payments to bondholders who are entitled to receive them. Several groups of investors who are filing these law suits claim their euro-dominated bonds do not fall in the jurisdiction of the U.S. courts, and have therefore taken the American Bank to court based on these grounds.

The Central Bank of Argentina has also reacted against the non-transfer of funds and the President of the country has sent in a proposal to the Congress proposing that BNY Mellon be replaced with a local bank, Banco De La Nación Argentina that would then act as a financial intermediary from now onwards. Furthermore, the government of the country has cancelled the operations license of the bank in its country as well.

In the midst of this all, the American Bank has maintained its stance of not transferring funds and the lawyers of the institution assert that there is nothing to be concerned about since the bank is actually the 'good guys' in this situation. The action being taken by BNY Mellon is probably a pressure tactic that is being used for the U.S. courts and is not likely to result in any major litigation or legal liability for the American Bank, which only claims to be following court orders itself.

Is BNY Mellon The Only One Taking The Hit?

Citigroup Inc. (NYSE:C) is in line to make it as another potential target of this dispute between the Argentine government and its bondholders since a subsidiary of the group is also responsible for making payments to bondholders of the country. Citibank, the subsidiary of the group, did not make any comments regarding the dispute and confirmed that Citibank's operations and the relationship that it has with its customers are not likely to be effected in any way by the situation.

Impact on BNY Mellon's Stock

Though it has been said that no major litigations or settlements are likely to arise from this situation, at least in the International Court of Justice, it is believed that in the long run the bank will be affected negatively since it will lose out on revenues from Argentina after being replaced as the trustee by a local bank.

In the coming years, BNY Mellon could see a reduction in its treasury fees. This could also result in an impact on the asset servicing fees for the bank if other countries, that also employ the bank as a financial intermediary, decide to replace the bank with other financial institutions instead. This could mean a decline in revenues for the bank in the years to come. The bank has already lost any chance to redeem itself in Argentina and operate in the country again. If this incident causes the bank to lose credibility in other countries as well, BNY Mellon could be looking at some potential losses in revenues and lower EPS in the future for shareholders who decide to hold the shares till that time. Investors who are risk averse might not want to wait until other countries replace BNY Mellon as a trustee in their country, though this is not a definite outcome from this event.

There is no certainty about the outcomes of the law suits filed against the bank in London and Belgian, although nothing major is expected out of those either, for the company at least. If the courts do rule against the withholding of payment to bondholders, the judgment would only lead to pressure on the U.S. District Judge who passed a ruling against making payments for bonds that are actually outside of the United States jurisdiction.

Thus, no major impact on share price is expected immediately, but based on the speculation surrounding the entire event; holding of this stock for longer periods is shadowed by uncertainty regarding future revenues and gains.

Source: How Would BNY Mellon's Dismissal From The Argentina Debt Deal Impact The Stock?