Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Do bonds belong to the lender or borrower?

A creditor of Argentina has got a New York court to attach bonds issued by Argentina.
Normally one hears of assets being attached, but here it appears that a liability is
being attached. This peculiar situation has arisen because Argentina is going through
a debt restructuring. The bonds in question had defaulted and the bond holders
had surrendered them for conversion into new bonds of reduced face value
as part of this debt restructuring.

In this context, the surrendered bonds could conceivably be an asset. To compound
the problem, the bonds are actually held by a custodian bank. The question will
then be whether this custodian is an agent of the bond holder or of the issuer.
If it is an agent of the issuer (Argentina) then the attachment may be tenable.
Otherwise the bonds do not belong to Argentina and the attachment would not
make sense. It is a strange legal situation and Argentina is trying hard
to get the order vacated

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