Caught between the Argentina government and a U.S. court order, Citigroup Inc. (C) is struggling for some reprieve. The bank is seeking U.S. District Judge Thomas Griesa to permit it to make payments on bonds, which were issued under Argentine law following the South American country’s default in 2001. The company said that it would face regulatory and criminal sanctions by the country and its Argentine banking license may be revoked upon failure to process the $5 million interest payment, which is due to bondholders by Sep 30.
Precisely, Citigroup is seeking to put on hold the court order issued by Griesa in 2012 that barred the bank from processing payments. Notably, the latest move follows the dismissal of the bank’s appeal to reconsider the court order on Friday in Federal Appeals Court for the Second Circuit. The court upheld that the case was not under its jurisdiction and hence it returned to Griesa’s court.
Argentina defaulted on its debt after a 30-day grace period on a $539 million interest payment expired on Jul 30, 2014 owing to the court orders. The court orders related to the ongoing litigation between Argentina and certain ‘holdout’ bond investors who refused to accept restructured bonds in the restructuring of Argentine debt following the nation’s default on its sovereign obligations in 2001.
In 2012, Griesa had ruled that until Argentina settles its $1.3 billion dispute with the two US hedge funds including NML Capital, it cannot service its restructured debt. Holders of about 92% of the debt had given their consent to exchange their bonds for new bonds at a 70% discount in 2005 and 2010 restructurings.
Although Argentine Economy Minister Axel Kicillof acknowledged that Citigroup had been restricted by Griesa's ruling, he added that the bank’s operations in Argentina were governed by local law. He said “If Citibank doesn't distribute the money, it will be violating Argentine law.”
On Sep 18 in the Federal Appeals Court, a lawyer for Citigroup Karen Wagner, said “We’re going to obey, and if we obey, we have a gun to our head and the gun will probably go off.”
A spokeswoman for Citigroup confirmed on Monday that the bank will contest the case in a further hearing on Friday, scheduled by Griesa.
Bottom Line
Notably, in an August filing Citigroup mentioned that Argentina’s default would worsen the nation’s economic scenario and could adversely affect the company’s revenues and funding costs. Also, it will restrict the company from hedging against its investments in Argentina. Additionally, it stated that the situation could make the company vulnerable to legal hassles as its role as a custodian in the country for certain restructured bonds that are currently covered by court orders.
While nothing can be inferred with certainty about the future rulings and potential impact on Citigroup’s business in Argentina, we look forward to the outcome of the upcoming hearing.
Citigroup currently carries a Zacks Rank #3 (Hold). Farmers Capital Bank Corp. (FFKT), First Community Bancshares, Inc. (FCBC) and Cardinal Financial Corp. (CFNL) are among the better-ranked stocks in the banking space. All these stocks sport a Zacks Rank #1 (Strong Buy).
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