By Davide Scigliuzzo

NEW YORK, Feb 27 (IFR) - Argentina's attempt to sell at least US$2bn of new Bonar 2024 bonds to non-US investors was abruptly interrupted this week when a US judge ordered banks managing the sale to produce documents and witnesses for a deposition on the deal.

Two people familiar with the matter said bookrunners Deutsche Bank and JP Morgan had decided to put the offering on hold as a precaution while they responded to the court's request.

"Argentina is not prevented from raising funds," one of the sources said. "Any restrictions (from the US courts) apply to the coupon payments on (some of) its bonds, not to its ability to raise capital." The same source said the deal could soon be back on, depending on the outcome of the legal proceedings.

US courts last year stopped coupon payments on nearly US$30bn in Argentine restructured debt after the sovereign refused to make whole holdout investors from its 2001 default. The US dollar-denominated Bonar 2024s, however, are seen as further removed from the US courts' reach as they were not issued as part of the country's 2005 and 2010 restructurings and are governed by Argentine law.

The two banks began sounding out investors for a reopening of the Bonar 2024s on Wednesday, targeting primarily hedge funds and real-money investors who recently participated in a bond sale from state-run oil company YPF. By opting for a private sale aimed at non-US accounts, the sovereign was hoping to sidestep US courts.

A few hours later, however, the US judge presiding over Argentina's decade-old dispute with holdout creditors issued an order requiring the banks to immediately hand over documents relevant to the transaction and to appear for a deposition on Thursday.

The order came in response to a subpoena served on February 9 by lead litigant creditor NML Capital, a unit of Elliott Management Corp, to the two banks.

US District Judge Thomas Griesa said late on Wednesday that the order he signed did not restrain any transaction. "It simply asks for discovery," Griesa said, according to a transcript of Wednesday's hearing.

Argentina, which has been shut out of the capital markets since its 2001 default, was hoping to use proceeds from the sale to refinance US$6bn of Boden 2015s coming due this year.

SURPRISE

The banks' decision to suspend the deal caught several market participants by surprise: they had expected lawyers advising lead managers to have thoroughly examined the potential legal risks.

"You would think they would have thoroughly vetted this with counsel before starting," said a syndicate banker not involved in the deal.

Investors evaluating the issue said their firms would have faced no legal hurdles by participating in the deal and generally appeared more forgiving.

"Banks have had significant legal troubles over the last few years, so I am sure their legal and compliance departments are especially sensitive to these issues," said one investor evaluating the offering. "I am not surprised they took this as seriously as they did."

While a new bond issue would have allowed Argentina to shore up low foreign exchange reserves, most believe the country can comfortably meet its upcoming bond maturities, including the Boden 2015 notes.

"They have enough liquidity and I have no reason to believe that they will do anything but pay the Boden 2015s when they come due," said the investor.

TRADING UP

Argentine bonds have rallied in recent weeks, partly driven by investor confidence that the October presidential election will usher in a more market-friendly government. President Cristina Kirchner cannot run for a third straight term.

The Boden 2015s were trading on Thursday at a cash price of around 102.5, while the existing Bonar 2024s, which on Wednesday slid one point in expectation of new supply, were back to 105.40-105.75, close to recent highs.

"I guess people are not expecting new supply to come any time soon," said a sovereign bond trader in New York.

A version of this story will appear in the February 28 issue of IFR Magazine

(Additional reporting by Daniel Bases and Joseph Ax; Editing by Matthew Davies)