Citigroup Inc. C continues to face setbacks related to its Argentine bond payment. After suspending the company from conducting capital market operations in the country, the government of Argentina filed a lawsuit against the New York-based bank.
The Argentine government stated that it was suing Citigroup as the company reached an agreement last month with the hedge funds that are engaged in a long standing legal tussle with the country. Axel Kicillof, Economy Minister mentioned that the government was seeking a ruling that would nullify the agreement in Argentine courts. Kicillof stated that the deal between Citgroup and the holdout creditors "violated and interfered with regulations governing our public debt."
Citigroup stated in a statement that it complied with a U.S. court order and was "disappointed" by the latest action taken by Argentina. Per the statement, "Citi has acted in accordance with all applicable laws and will respond to these actions in due course."
The U.S. court last month 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 was a violation of Argentine law.
The Story So Far
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 custodian 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, U.S. District Judge Thomas 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.
Following Griesa’s ruling, the Wall Street banking giant 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.
However, a U.S. federal court later permitted the company to process two interest payments on the Argentine bonds after the bank struck a deal with NML Capital and the creditors.
The deal led to the suspension of Citigroup’s capital market operations in the South American nation. The commission then stated “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.”
Further, the Argentine government forced Citigroup to suspend the CEO of Citibank Argentina.
Bottom Line
Citigroup and the issue related to the Argentine bond payment took a new turn with Argentina’s latest move. It cannot be concluded with certainty what further consequences the company is likely to face.
Citigroup currently carries a Zacks Rank #2 (Buy). Other well-ranked stocks in the finance sector include Silvercrest Asset Management Group Inc. SAMG, Pinnacle Financial Partners Inc. PNFP and FCB Financial Holdings, Inc. FCB. All three stocks sport a Zacks Rank #1 (Strong Buy).
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