Citigroup Inc. C received some relief in the long standing legal brawl related to its Argentine bond payment. The bank said that a U.S. federal court permitted the company to process two interest payments on the Argentine bonds. The company is now allowed to process payment on Mar 31 and Jun 30 on the dollar-denominated bonds.
Following a U.S judge’s ruling earlier this month that prohibited the bank from processing payments on bonds, the Wall Street bank revealed its plans to exit its custody business in Argentina.
Citigroup had cited in a letter to U.S. District Judge Thomas Griesa that the bank’s decision to exit 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. In this context Citigroup mentioned in its latest statement that the court will not create any hindrance for the bank from exiting custody business in Argentina.
In Brief
The case has it roots in 2001 when Argentina defaulted on almost $100 billion sovereign obligation. This led to restructuring of the defaulted bonds in 2005 and 2010. However, certain ‘holdout’ bond investors including US hedge fund NML Capital refused to accept the discounted restructured bonds. They sued Argentina and demanded full payment.
Owing to its custodial role, Citigroup is required to distribute interest payments to clearinghouses that finally pay the bondholders. However, Citigroup was caught between the Argentina government and U.S. court order owing to the legal tussle between Argentina and the holdout bond investors.
In 2012, Griesa had ruled that until Argentina settles its dispute with holdouts, it cannot service its restructured debt.
Citigroup had appealed to the court for allowing the company to process the payment. However, turning down the company’s appeal, on Mar 12, Griesa ruled that the bank is restricted from processing payments on dollar-denominated Argentine exchange bonds. On the other hand, the Argentine government warned that Citigroup’s Argentine banking license will be revoked upon the bank’s failure to process the payment.
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. 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
The latest court order allowing Citigroup to process payments seems to be an outcome of the agreement reached by NML Capital and creditors with Citigroup. Per a spokesperson for NML Capital, “Judge Griesa approved this agreement, which applies only to Citibank and was specifically tailored to address the unique circumstances facing Citi Argentina after Citibank announced it was exiting the custody business in Argentina.”
Argentina, which is presently crippled with a huge debt burden, Griesa’s ruling eases some pressure on the nation’s ability to pay the bond holders. For, Citigroup, the ruling undoubtedly provides some saving grace, at least for the time being.
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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