The Argentine government has suspended Citigroup Inc.’s C local unit from capital market trading in the country after the bank reached an agreement with the hedge funds that are engaged in a long standing legal tussle with the country.
The U.S. court last week allowed Citigroup to process two interest payments on the dollar-denominated bonds after the bank reached an agreement with the holdout bond investors including US hedge fund NML Capital.
However, the securities commission stated that such an agreement constitutes violation of Argentine law. Per the commission “The National Securities and Exchange Commission today preventively suspended Citibank NA from operating in the capital market because it believes that by signing an agreement with the hedge funds… it did not act in according with Argentine legislation.”
Citigroup’s commercial banking business in Argentina is not likely to bear any impact due to the suspension.
Following U.S. District Judge Thomas Griesa’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 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 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 battle 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 to allow the company to process the payment. 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. However, last week a U.S. federal court permitted the company to process two interest payments on the Argentine bonds after the bank struck a deal with NML Capital and the creditors.
Bottom-Line
Citigroup and the issue related to the Argentine bond payment took a new turn with the latest suspension order. While nothing can be concluded with certainty what further consequences the company is likely to face, we look forward to the bank’s future course of action.
Citigroup currently carries a Zacks Rank #2 (Buy). Some-better ranked stocks in the finance sector include Customers Bancorp, Inc. CUBI, Pinnacle Financial Partners Inc. PNFP and Investment Technology Group Inc. ITG. All three stocks sport a Zacks Rank #1 (Strong Buy).
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