Argentine Bonds Plunge

As Argentina's government proposes swapping securities subject to U.S. law with local debt, selloff of the nation's bonds extended.

Argentine bonds fell, deepening a selloff since the country lost a bid to reverse a U.S. court ruling that it must pay holders of defaulted notes in full, as investors doubted the nation can skirt the order and avoid default with a plan to shift overseas debt to the local market.

The proposal last night by Economy Minister Axel Kicillof to swap securities subject to New York laws into local debt is technically difficult and of limited appeal for many holders of the restructured notes, analysts at Credit Suisse Group AG, Citigroup Inc., and Jefferies Group LLC said in reports.

“It is difficult to imagine any financial intermediaries or even legal advisories willing to take the risk of being perceived as violating a U.S. Court order,” Citigroup’s Guillermo Mondino and Jeffrey Williams wrote. “A significant number of market participants may have to either sell their holdings or hold on to a bond that might enter technical default.”

Officials overseeing South America’s second-largest economy say the nation doesn’t have sufficient reserves to pay what they estimate could be $15 billion of claims from holders of defaulted bonds that didn’t participate in two debt exchanges following the country’s 2001 default. After the U.S. Supreme Court said June 16 it wouldn’t consider the case, Argentina is bound by a U.S. District Court ruling that it can’t make interest payments to holders of restructured international bonds without paying the defaulted notes as well.

Cabinet officials will meet with lawmakers today to discuss how to shift investors into local-law bonds, Kicillof told reporters last night. The government will also send lawyers to meet with U.S. District Judge Thomas Griesa in New York to discuss the ruling, he said.


Yield Spread

Restructured bonds tumbled for a third day, with the extra yield investors demand to own Argentine debt over Treasuries widening 0.21 percentage point to 8.94 percentage points at 9:45 a.m. in New York. Disobeying the court order could cause a technical default and further isolate a country that’s already experiencing slow growth and high inflation, said Mauro Roca, a senior Latin America economist at Goldman Sachs Group Inc.

“Of the possible scenarios, this was the most adverse,” Roca said in a telephone interview from New York.

Following the record $95 billion default 13 years ago, Argentina in 2005 offered to exchange its defaulted securities with bonds worth about 30 cents on the dollar and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt. The holdouts, including billionaire hedge-fund manager Paul Singer’s NML Capital, fought for full payment in court.

An interest payment of $907 million on restructured notes is due on June 30. To avoid suspending payments, Argentina will ask bondholders to swap debt sold under New York law into securities governed by Argentine legislation and therefore not subject to U.S. court orders.

If the government doesn’t make the interest payment on the restructured notes this month, the bonds will be in default after a 30-day grace period.

“Argentina officials continue to signal a workaround solution on the difficult logistics to negotiate with holdouts,” Siobhan Morden, head of Latin America strategy at Jefferies, wrote in a report today. “Most important to bondholders is how they resolve the legal risks to attract high participation from conversion of New York to local-law bonds.”

Restructured bonds due 2033 plunged 2.82 cents to 70.38 cents on the dollar, the lowest price since March. Yields on the securities rose 0.55 percentage point to 12.85 percent. The spread on Argentine bonds versus Treasuries is the highest in emerging markets after Venezuela, according to data compiled by JPMorgan Chase & Co.

The upfront cost to buy protection against an Argentine default for one year with credit-default swaps has soared 20 percentage points this week to 39.05 yesterday, according to prices compiled by CMA.

Kicillof said that complying with the U.S. ruling would jeopardize the country’s ability to honor the restructured debt, since paying the plaintiffs the $1.5 billion they say they’re owed would trigger demands from other holdout creditors for similar terms. The estimated $15 billion in claims amounts to more than half Argentina’s international reserves.

Central bank reserves, which the government uses to pay its debt, have fallen 25 percent in the past year to $28.8 billion. In March, Argentina’s economy contracted for the first time since September 2012 as the government implements policies to stem a drain on central bank funds. Consumer prices rose an accumulated 12.9 percent in the first five months of the year.


S&P Cut

Standard & Poor’s yesterday downgraded Argentina to CCC-, nine levels below investment grade, citing the court ruling.

“A default or a distressed debt exchange pertaining to currently-serviced debt appears to be inevitable within six months,” S&P said in an e-mailed statement yesterday.

Argentina’s plan to meet with judge Griesa is a sign that the government may still be considering a negotiated settlement with the holdouts, according to Alejo Costa, a strategist at Buenos Aires-based brokerage Puente Hermanos Sociedad de Bolsa SA.

“Kicillof showed willingness to negotiate, but not willing to pay the $1.5 billion in cash,” Costa wrote in e-mailed comments. “If the court proposes an alternative plan perhaps there will be a negotiated solution.”

Kicillof said the government wouldn’t allow hedge funds to sabotage its efforts to rebuild the country after the debt crisis in 2001. He referred to the holders of defaulted bonds as “vultures” because they seek to profit by buying distressed assets.

“Some people say that we need to negotiate with the vultures,” Kicillof said. “The vultures are vultures because they don’t negotiate. The vultures are vultures because they go to court to get the full total of their claims.”

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