SECTOR COMMENT

SOVEREIGN & SUPRANATIONAL

AUGUST 25, 2014

Argentinas Proposal to Bypass US Court
Rulings Is Credit Negative for the Sovereign,
Banks and Corporates
From Credit Outlook
Last Tuesday, the Government of Argentina (Caa1 negative) announced a new draft law
aimed at sidestepping US court rulings that have blocked it from making payments to
bondholders without simultaneously paying certain holdout bondholders. But on
Thursday, US District Judge Thomas Griesa called Argentinas proposed actions illegal,
forbidding third parties from assisting Argentina in circumventing court orders and raising
serious questions about whether the proposal will be achievable.
This article discusses the credit negative effect of the proposal on the sovereign and on
Argentine banks and corporates. Argentinas move to sidestep US court rulings highlights the
countrys weak institutional framework. Argentine banks involvement in a debt exchange is
likely to further isolate them from the international financial community. Financial isolation
would bring significant disruptions to the countrys economy and would be detrimental to
corporates.
The Sovereign
Argentinas decision to ignore US legal rulings after voluntarily accepting the US courts
jurisdiction in the past and the unpredictable approach taken to resolve the debt impasse are
credit negative. These decisions also highlight Argentinas weak institutional framework, an
important driver behind Argentinas low rating.
Disbursements to holders of certain Argentine foreign-legislation bonds restructured in 2005
and 2010 have been frozen by US court orders since 26 June, when Argentina deposited the
required amounts into a trustee account in Buenos Aires. US court rulings require Argentina
to pay holdout bondholders concurrently with any payments it makes to holders of its
restructured debt, which Argentina refuses to do. The original payment was due 30 June and
the payment prohibition resulted in an event of default by Moodys definition on 30 July, at
the end of a 30-day grace period.
Argentina now seeks to bypass the payment prohibition via two separate approaches. First,
the country proposes changing the trustee of the restructured bonds to Nacion Fideicomisos,
a subsidiary of the government-owned commercial bank Banco de la Nacion (unrated),
which would presumably follow government instructions. Second, it will offer restructured
bondholders a voluntary exchange of foreign-legislation debt for local-legislation obligations,
over which Argentina believes US courts would have no jurisdiction.










What is Moodys Credit Outlook?
Published every Monday and Thursday
morning, Moody's Credit Outlook informs
our research clients of the credit
implications of current events.

Gabriel Torres
Vice President - Senior Credit Officer
+1.212.553.3769
gabriel.torres@moodys.com



SOVEREIGN & SUPRANATIONAL
2 AUGUST 25, 2014


SECTOR COMMENT: ARGENTINAS PROPOSAL TO BYPASS US COURT RULINGS IS
CREDIT NEGATIVE FOR THE SOVEREIGN, BANKS AND CORPORATES

Assuming the terms envisage a precisely like-for-like exchange, Argentinas proposal would, if
successful, be an opportunity for restructured bondholders to receive all scheduled payments.
However, it remains unclear whether the proposal will come into effect. Judge Griesas reaction will
likely impede the current trustee and other involved parties from providing Argentina the data and
assistance needed to carry out the swap or transfer funds to a new trustee. Even if a swap or transfer
were possible, it is not clear whether the new trustee would be able to disburse funds within the US
dollar clearing system given the US courts objections. The (P)Caa2 rating of these exchange securities
encompasses the range of possible outcomes, including the likely loss to investors from the continuing
default.
Argentinas more belligerent approach will prevent the country from accessing international capital
markets, and official reserves are already under pressure (see exhibit below). Official reserves, which are
the governments sole source for meeting its foreign-currency obligations, have fallen 47% in the past
three years. Continued pressure on reserves will likely exacerbate inflation that is already higher than
30% on an annual basis through faster devaluation, thereby deepening Argentinas ongoing recession.
Argentinas Official Reserves Have Fallen 47% Since 2011

Source: Haver Analytics, Central Bank of Argentina

Banks
Argentinas debt proposal are credit negative for Argentine banks because their potential involvement
in the sovereign bond exchange is likely to further isolate them from the international financial
community, limiting their ability to deal with US banks or other foreign institutions.
Implementation of the swap will require the involvement of Argentine financial intermediaries and, in
the context of the US Supreme Courts ruling, will place them in uncertain legal territory. The legal
and financial uncertainties surrounding this move will deepen the countrys economic slump, leading
to a longer-than-expected recession.
The governments proposal would allow bondholders to ignore their current contracts and get paid in
Buenos Aires, or swap their debt for new securities governed by Argentine law. The bill includes the
removal of The Bank of New York Mellon (Aa2 stable, B-/a1 stable
1
) as trustee for exchange bonds
and the appointment of the government-owned Nacion Fideicomisos (unrated) as replacement trustee.

1
The bank ratings shown in this report are The Bank of New York Mellons deposit rating, its standalone bank financial strength rating/baseline credit assessment and the
corresponding rating outlooks.
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Valeria Azconegui
Assistant Vice President - Analyst
+54.11.5129.2611
valeria.azconegui@moodys.com
This publication does not announce
a credit rating action. For any
credit ratings referenced in this
publication, please see the ratings
tab on the issuer/entity page on
www.moodys.com for the most
updated credit rating action
information and rating history.



SOVEREIGN & SUPRANATIONAL
3 AUGUST 25, 2014


SECTOR COMMENT: ARGENTINAS PROPOSAL TO BYPASS US COURT RULINGS IS
CREDIT NEGATIVE FOR THE SOVEREIGN, BANKS AND CORPORATES

A swap for bonds under local jurisdiction would go against orders issued by US District Court Judge
Griesa last year, which complicates the participation of US-based intermediaries and could result in
those intermediaries being held in contempt of the US courts orders. The approval of this bill will
likely reduce the chances that the sovereign, as well as banks and other market participants, will soon
regain access to international markets.
Argentine banks deposit mix has shifted dramatically since the introduction of foreign exchange and
capital controls in November 2011. Foreign-currency funding only accounts for 8% of total liabilities
following the sharp decline in dollar-denominated deposits triggered by the implementation of the
restrictions (see exhibit below). Consequently, foreign trade facilities and interbank credit lines (which
account for roughly 4% of total liabilities) are more important sources of funding to finance loans to
exporters, particularly those related to agribusiness. A potential decrease in banks foreign-currency
funding, coupled with less access to international markets, will discourage these types of loans (which
were 10% of banks total lending two years ago, and have decreased to about 4% this year). This will
further lower banks business prospects and margins amid decelerating lending growth and high
inflation.
Argentine Banks US Dollar Private-Sector Deposits and Loans Fall Sharply

Source: Central Bank of Argentina

Argentina has been in an economic recession since first-quarter 2014, with banks business volumes
and earnings already declining, and the uncertainly about a sovereign debt swap and a prolonged
default will likely make matters worse. Should the government proposal be approved by the Argentine
National Congress, we expect a prolonged stagnation given that GDP growth will be hampered and
inflation will rise, hurting both the employment rate and households real wages. Moreover, the lack of
capital inflows and potentially rising capital outflows will likely pressure the foreign exchange rate and
the Argentine Central Banks international reserves.
Although the deteriorating operating environment will cause a decline in banks financial performance,
there is little risk that lenders face an imminent solvency crisis. Banks reduced lending appetite has
resulted in a buildup of liquidity, which has helped them prepare for the default and a weaker
economy. Capitalization is strong, and deposits have remained relatively stable this year, despite rising
anxiety among savers amid a currency devaluation.

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US Dollar Loans US Dollar Deposits



SOVEREIGN & SUPRANATIONAL
4 AUGUST 25, 2014


SECTOR COMMENT: ARGENTINAS PROPOSAL TO BYPASS US COURT RULINGS IS
CREDIT NEGATIVE FOR THE SOVEREIGN, BANKS AND CORPORATES

Corporates
The financial isolation resulting from an Argentine debt swap would bring significant disruptions to
the countrys economy through GDP stagnation, inflation and currency devaluation. Local-currency
depreciation will increase the cost of foreign-currency debt. We also expect a halt in government
spending on public works and infrastructure. Rare beneficiaries of the turmoil will be those companies
that earn foreign-currency revenue, yet have peso-denominated debt.
Companies with Argentine peso revenue and foreign-currency debt include CableVision S.A. (Caa1
negative), which generates all of its revenues in pesos, yet approximately 90% of its debt is
denominated in US dollars.
A halt in federal and local government spending on public works and infrastructure would affect
construction companies, such as Jose Cartellone Construcciones Civiles S.A. (Caa1 negative) and
Electroingenieria S.A. (Caa1 negative), which generate more than 90% of their revenues from
government contracts.
Manufacturer dependency on foreign product inputs has declined over the past years, given the
imported-goods controls in place. However, companies such as Newsan S.A. (B3 stable), Mirgor S.A.
(Caa1 negative), Sullair Argentina S.A. (Caa1 stable) and Car Security S.A. (Caa1 negative) still import
a reduced amount of products and raw materials. Even though the imports account for a small portion
of their costs, if import permissions come to a halt for an extended period, the companies will be
affected because some of the imported goods cannot be found in the domestic market.
Exporters will benefit as the value of foreign-currency revenue increases in relation to Argentine peso
depreciation. Asociacion de Cooperativas Argentinas Coop (B3 stable) generates 62% of its revenues in
foreign currency and 58% of its debt is peso-denominated.
Many rated non-financial companies in Argentina have elevated liquidity risk. These companies have
significant debt coming due within one year, limited cash in relation to upcoming maturities, sizable
negative free cash flow and they lack access to committed bank credit facilities. Companies with some
combination of these factors include Carsa S.A., Longvie S.A., Papel Misionero S.A.I.F.C., and Zucamor
S.A., which are all rated Caa1 negative.

Martina Gallardo Barreyro
Analyst
+54.11.5129.2643
martina.gallardobarreyro@moodys.com
Veronica Amendola
Vice President - Senior Analyst
+54.11.5129.2610
veronica.amendola@moodys.com



SOVEREIGN & SUPRANATIONAL
5 AUGUST 25, 2014


SECTOR COMMENT: ARGENTINAS PROPOSAL TO BYPASS US COURT RULINGS IS
CREDIT NEGATIVE FOR THE SOVEREIGN, BANKS AND CORPORATES



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Report Number: 174711
Authors
Gabriel Torres
Valeria Azconegui
Martina Gallardo Barreyro
Veronica Amendola
Production Specialist
Wing Chan