BNY Mellon Faces Ouster From Argentina Debt Deal, Lawsuit Over Related Payments

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Bank of New York Mellon (NYSE:BK) is under fire from the Argentine government as well as investors in the country’s debt offerings for refusing to release $539 million in interest payments it has been holding on to since June in its capacity as financial intermediary. [1] While the country has cancelled the global custodian’s license to operate as trustee for the government bonds, an investor group has filed a lawsuit against the bank for not paying them their share of the interest. Both parties accuse BNY Mellon of failing in its duty as a trustee. For its part, the custody bank is acting in accordance with a U.S. court ruling last month which prevents Argentina from making interest payments to one group of investors without first paying off another group.

Although we don’t expect BNY Mellon to incur any direct financial penalties from the ongoing debt row, the bank’s loss of the Argentine government as a client is bound to have repercussions for its operations in the region in the long run. But the negative impact of this on the world’s largest custody bank does not warrant a revision in our $37 price estimate for BNY Mellon’s stock.

See our full analysis for BNY Mellon here

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When Argentina defaulted on its debt in 2001, a majority of investors holding the country’s debt agreed to a restructuring agreement conducted in two phases in 2005 and 2010. But some of the investors refused to be a part of any deal, and took the matter against Argentina to court in an attempt to fully recoup their investments. The ‘holdout’ investors, including NML Capital Fund and Aurelius Capital Management, won the lawsuit and a U.S. court concluded in 2012 that the Argentine government owes them $1.3 billion. [2] While the ruling is being reviewed by the supreme court, the U.S. District Court in New York ruled in June that Argentina cannot pay interest to investors in the restructured debt unless the holdout investors are paid first. Complying with this court order, BNY Mellon refused to disburse interest payments of $539 million from Argentina, triggering a bigger issue.

As the move by the custody bank goes against Argentina as well as holders of the restructured debt, both these parties are now trying to wrest the blocked money out of BNY Mellon’s hands. Argentina aims to do this by revoking BNY Mellon’s rights as a trustee and passing a minor law to appoint the state-run Banco De La Nación Argentina as the financial intermediary. The country has also threatened to sue BNY Mellon if the bank does not return its money soon. At the same time, a group of investors who own €1.3 billion ($1.7 billion) of the restructured notes have already dragged BNY Mellon to court over their share of the interest payment claiming that their euro-denominated bonds are outside the jurisdiction of U.S. courts.

The action against BNY Mellon is likely being used to pressure U.S. courts to settle the matter quickly, and may not result in any legal liability for the custody bank itself. However, we do believe that the bank’s revenues from Argentina will be negatively impacted over coming years from the country’s decision to replace it as trustee to all its debt offerings. This directly affects the bank’s treasury fees as of now, and could also hit its asset servicing fees if state-held entities which currently employ the bank’s services as a custodian also pull out from its services.

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Notes:
  1. BNY Mellon sucked into center of Argentine debt storm, Reuters, Aug 26 2014 []
  2. NML Seeks With Aurelius to Uphold Argentina Bond Rulings, Bloomberg,  Jan 25 2013 []