Citigroup Inc. C, caught between the U.S. court order and the government of Argentina related to its Argentine bond payment, seems have finally decided its next course of action. The New York based bank plans to exit its custody business in Argentina, following a U.S judge’s ruling last week that prohibited the bank from processing payments on bonds.
Citigroup said in a letter to U.S. District Judge Thomas Griesa that the bank’s decision comes on the back of the court ruling and also due to the Argentine government’s repeated threats of revoking Citigroup’s banking license and imposing criminal, civil and administrative sanctions.
Per the letter, “Citibank has determined to have its Argentine branch, Citibank Argentina, develop, and execute, a plan to exit the custody business in Argentina as soon as possible.” While the manner of exit is yet not decided, the company may consider sale of certain portions of the custody business or end account relationships, notifying customers.
The Story So Far
The bonds were issued under Argentine law following the South American country’s default in 2001. Owing to its custodian role, Citigroup is required to distribute interest payments to clearinghouses that finally pay the bondholders. Notably, an interest payment of $3.7 million is due on Mar 31.
Turning down Citigroup’s appeal to process the payment, on Mar 12, Griesa ruled that the bank is restricted from processing payments on dollar-denominated Argentine exchange bonds as allowing the company to process the payments would constitute violation of Argentine law that requires the nation to treat bondholders equally.
However, the Argentine government warned that the Citigroup’s Argentine banking license will be revoked upon the bank’s failure to process the payment. The Argentine Economy Ministry had argued that Griesa’s ruling doesn’t have a legal standing as the bonds were issued under law of Argentina.
Griesa’s Mar 12 ruling upheld his Jul 28, 2014 order that restricted Citigroup from processing any payment on the bonds. Consequently, 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 were related to the ongoing litigation between Argentina and certain ‘holdout’ bond investors including US hedge fund NML Capital who refused to accept the discounted restructured bonds in the restructuring of Argentine debt following the nation’s default on its sovereign obligations in 2001 and demanded full payment.
In 2012, Griesa had ruled that until Argentina settles its dispute with holdouts, it cannot service its restructured debt. Notably, in contrast to the Mar 12 ruling, Griesa allowed Citigroup to process “one-time” bond payments in Jul 2014, Sep 2014 and Dec 2014 as the holdout bondholders agreed to the transfers.
Bottom-Line
For Argentina, which is presently crippled with a huge debt burden, Griesa’ ruling undoubtedly limited its opportunities to extract funding from the international debt markets. Griesa has recommended Argentina to settle the issues with the holdout bondholders by working with the mediator appointed by the court. Citigroup’s latest decision further worsened the nation’s ability to pay the bond holders.
Citigroup claims that it has been victimized by the “unprecedented international conflict of laws.” The company undoubtedly faces risk in its Argentine operations in which it has around $780 million in net investments as of Dec 2014.
We believe the issue with Argentina is a lesson for the Wall Street banking giant. Going forward, before establishing a custodian business in any foreign nation, Citigroup will perhaps exercise more caution in studying all the necessary issues including existing laws and regulations and debt position of the country while evaluating its business feasibility.
Citigroup currently carries a Zacks Rank #2 (Buy). Some-better ranked stocks in the finance space include Cowen Group, Inc. COWN, Investment Technology Group Inc. ITG and JMP Group LLC JMP. All three stocks sport a Zacks Rank #1 (Strong Buy).
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