The 105-Cent Defaulted Bonds That Keep Soaring: Argentina Credit

As Argentina’s defaulted debtholders form a group to push for the best deal they can get from the government, the price of their notes is already soaring.

The 105-cent-on-the-dollar price tag is even higher than that for all of Argentina’s current foreign bonds, the result of a surge in demand after a U.S. court gave the government until July 30 to settle a case with holdout creditors or risk triggering a new default. The notes are up from 85 cents 11 days ago and traded as low as 40 cents a year ago, according to Advanced Capital Securities SA and Seaport Group LLC.

Holdouts gathered on a conference call yesterday arranged by Bingham McCutchen LLP to set up a creditor committee while Economy Minister Axel Kicillof sought a stay of the court order to allow more time to cut a deal. While most defaulted bonds aren’t covered by the court ruling, which stemmed from a lawsuit brought by hedge fund Elliott Management Corp. and other creditors, investors are betting the government will try to settle with everyone to resolve the dispute once and for all.

“No one wants to see a default,” said Michael Roche, a strategist at Seaport. “The way to avoid that outcome is for sufficient progress to be made in negotiations to be demonstrated to the judge that he will grant the temporary postponement or stay.”

The extra yield investors demand to hold Argentina’s restructured bonds instead of U.S. Treasuries fell 0.22 percentage point to 6.59 percentage points at 2:51 p.m. in New York, according to JPMorgan Chase & Co.’s EMBIG index.

Grace Period

Kicillof met with court-appointed mediator Daniel Pollack for four hours in New York yesterday. Argentine officials will hold additional talks with Pollack on July 11, cabinet chief Jorge Capitanich told reporters in Buenos Aires.

About 7 percent of the debt from Argentina’s record $95 billion default in 2001 was held out of restructurings in 2005 and 2010 by investors who rejected an offer of 30 cents on the dollar. U.S. District Judge Thomas Griesa on June 27 blocked trustee Bank of New York Mellon Corp. from transferring $539 million to holders of restructured bonds until the plaintiffs are paid. Argentina is using a 30-day grace period that began June 30 to try to find a solution to its conflict with holdouts and avert a default on the restructured bonds.

In an e-mailed statement yesterday, the Argentine Economy Ministry said the stay should be restored as talks continue.

“As interpreted, Griesa’s sentence would be impossible to comply with,” the ministry said.

Creditor Call

“The discussions have been frank, the principal issues have been identified, and the parties have indicated an intention to continue meeting,” Pollack said in a statement yesterday. Pollack met with holders of defaulted debt last week.

The call organized by Bingham McCutchen was intended for investors who haven’t obtained a court judgment on their securities, according to a letter obtained by Bloomberg News.

“Given Argentina’s openly stated desire to resolve 100 percent of its debt, we predict the most valuable holdout organization will be one that credibly includes representation of as broad a base of bonds as possible,” Bingham McCutchen’s letter said.

There are still about $6.6 billion of bonds from the default that weren’t swapped in the restructurings, according to data from the Economy Ministry. Kicillof has said that paying Elliott will give rise to $15 billion in additional claims from other holdouts.

Concrete Steps

“Defaulted bond prices are very high and there are no sellers,” said Carlos Abadi, chief executive officer of New York-based investment bank ACGM Inc.

Argentina won’t negotiate with holdouts unless the court indefinitely suspends the orders, Jay Newman, a money manager at Elliott, said yesterday in an opinion piece published in the Financial Times.

“Our firm could be persuaded to give Argentina more time if its government took concrete and serious steps towards meeting its legal obligations,” he wrote.

Elliott would be willing to accept part of any settlement in bonds and other financial instruments, Newman wrote.

The price of the bonds whose interest payment was blocked by the court and that mature in 2033 rose 1.16 cent today to 87.49 cents on the dollar, according to data compiled by Bloomberg. The price reached as low as 61.25 cents in January.

RUFO Clause

Argentina says that before Dec. 31 it can’t voluntarily make a better offer to the holdouts than in previous debt swaps in order to not violate the Rights Upon Future Offers clause, or RUFO, in the restructured bond contracts.

“Buyers today see getting paid in the coming months in better conditions than the 2010 restructuring,” Alejandro Senorino, a fixed-income trader at Advanced Capital said. “Argentina has enough incentives to reach an agreement but the key question is how to overcome the RUFO clause.”

To contact the reporter on this story: Pablo Gonzalez in Buenos Aires at pgonzalez49@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Brendan Walsh at bwalsh8@bloomberg.net Daniel Cancel, Lester Pimentel

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