Argentina challenges US court with $500m bond offer

Argentina was seeking to raise $500 million in a new debt issue Tuesday that could challenge efforts by hedge funds to force the country to pay off bonds they hold.

Buenos Aires announced the new issue late Monday of nine-year BONAR bonds at 8.75 percent under local law.

The issue was part of the financially strained government's efforts to overcome a US court's effective block on the country's access to global capital markets.

Market reaction to the offering was not immediately clear. If investors take up the bonds, it could open a separate channel for the country to fund its needs.

But one of the New York hedge funds involved in the long-running suit against Buenos Aires warned that it could seek to place the new bonds under its litigation.

"Those contemplating participation in Argentina's latest attempt at a global offer should understand that it appears to have all the hallmarks of external indebtedness that is covered by our pari passu rights," said Robert Cohen, an attorney for NML Capital.

"We are closely scrutinizing this highly unusual transaction to determine what enforcement actions are appropriate."

US Judge Thomas Griesa has forbidden Argentina from servicing its international debts until it pays off hedge funds which refused to take part in the restructuring of the $100 billion in debt the country defaulted on in 2001.

Most of the country's creditors at the time accepted large writedowns of the bonds to make the restructuring work, but the hedge funds demanded the full face value of their bonds, which they had purchased speculatively at huge discounts when the default took place.

After a long legal process Griesa ruled for the hedge funds -- saying they had "pari passu" or equal payment rights -- and blocked any payments made to other international creditors until the hedge funds were compensated.

Argentina has refused, and tried to forward payments to the majority bondholders but was stymied by Griesa's block on the payment agents.

Griesa last year ordered Bank of New York Mellon to not forward the government's payments on restructured bonds issued under US law  to creditors.

Then in March he said Citigroup's Argentina unit was not permitted to forward payments on US dollar bonds issued under Argentine law, because the bonds were still classified as external debt and so fell under the hedge fund lawsuit.