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NEW YORK, Aug 8 (IFR) - Holdout creditors are considering an offer from international banks of 80 cents on the dollar for at least part of their holdings of about US$1.66bn of Argentina debt, but the road to any deal will be fraught with difficulty.
Sources close to the situation said that Citigroup, Deutsche Bank, JP Morgan and HSBC, the four banks involved, are unwilling to absorb the entire amount of debt in question, as they want holdouts to have reason to keep participating in the drawn-out legal fight over the sovereign's obligations.
The banks may, nonetheless, be willing to buy some of the holdout creditors' debt, possibly as part of a wider consortium that they will put together.
It is unknown if an eventual agreement would include all four banks, or only some of them, one source said - though all are in intense negotiations over the securities in question.
One factor making a deal more likely is that, since Argentina defaulted on previously restructured debt on July 30, other bondholders could accelerate those bonds. That could potentially leave the holdouts, who refused the restructuring deal that the others accepted, with nothing at all to show for a roughly decade-long legal fight to get payment in full from the sovereign.
This is because an acceleration would mean the holdouts become just another set of creditors seeking full payment rather than being at the front of the queue as they were before Argentina's latest default. The holdouts are led by Aurelius Capital and NML Capital.
" are petrified that par bondholders would accelerate," said an investor close to the talks. "That would leave them in a no-win position."
At the same time, banks that end up buying the holdouts' paper will be looking for assurances that the sovereign will repay the bonds they buy at par next year, after the expiry of a so-called RUFO clause, which Argentina has used as reason for not paying the holdouts.
But any guarantee of full payment, implied or explicit, could potentially be construed as a violation of the clause, which could open Argentina up to a raft of new claims - for up to US$29bn - as bondholders who took part in previous restructurings demand the same payment terms as the holdouts receive.
The sovereign has repeatedly cited the clause in its battles in the US courts.
"The banks have so far received no guarantees from the government that they might get better terms than those offered in the 2005 and 2010 restructurings once the RUFO clause expires," said the investor. "Such a guarantee would be required by the banks to complete a deal."
At 80 cents on the dollar, payment on the current US$1.66bn claim would come to around US$1.32bn, but a certain percentage of the debt is expected to remain in the hands of the holdouts. How much banks cover remains unclear, but talk has them taking as little as 25% of the entire claim, which will grow to around US$1.75bn by January.
Citigroup, Deutsche Bank, JP Morgan and HSBC declined to comment.
Another piece of this confusing puzzle is US judge Thomas Griesa, who ruled in 2012 that Argentina could not make any more payments to the holders of its restructured debt until it made the holdouts whole. Griesa put a stay on that ruling to allow Argentina to appeal against it.
After the US Supreme Court declined to hear the appeal several weeks ago, Griesa lifted the stay and then ordered trustee banks not to release Argentine funds for the restructured coupon payments if the holdouts were not paid too.
Any deal now that sees international banks buy up the holdouts' paper would theoretically mean getting Griesa to somehow suspend those previous orders - at least until the end of 2014, when the RUFO clause expires.
This would ostensibly allow for Argentina to make the payment on the restructured bonds within a 60-day window, which could vanquish the threat of cross-default on all New York law bonds and allow Argentina to cure its latest default.
But that is quite a lot of "maybes" and "ifs". And in the meantime a whole new threat has emerged from "me-too" claimants - creditors who have not taken part in the holdouts' legal battle against the sovereign yet who also did not accept the 2005 and 2010 debt restructurings.
Some of these claimants have already filed a motion through law firm Proskauer asking Griesa to extend them the pari passu protection that he has provided for NML and others, according to a letter seen by IFR.
Jan Dehn, head of research at Ashmore Management in London, said the combined claims of current plaintiffs and the me-toos was "about US$15bn, which is more than half of Argentina's FX reserves".
"Griesa could conceivably grant a new injunction to the me-too claimants before 2015, which would bring us back to square one," the lawyer said.
The prospect of starting a decade-long litigation all over again will appeal to absolutely no one, of course - which also should mitigate in favour of some kind of deal being reached.
While these many moving parts are confusing, the market tended towards optimism that a deal with holdouts could be struck, with the country's bonds rallying this week.
The Discount 2033 notes jumped by three price points on Wednesday and by another 2.5 points on Thursday to a cash price of 88-89.
The Par 2038 notes rose from 52.75 at the open on Wednesday to as high as 55.50 on Thursday. (Reporting By Joan Magee; Davide Scigliuzzo; Editing By Marc Carnegie, Paul Kilby and Matthew Davies)