Argentina is set to default in less than two weeks unless it reaches a deal with holders of defaulted bonds or U.S. courts grant a delay to allow the nation to continue servicing restructured bonds.
U.S. Judge Thomas Griesa blocked the country’s attempt to make a June 30 bond payment, saying it must also comply with an order to pay $1.5 billion to hedge funds and other holders of defaulted bonds that sued for full repayment. As the 30-day grace period winds down, here are three possible outcomes:
1) Argentina and Holdout Creditors Reach a Deal by July 30
A settlement with creditors holding untendered securities from the nation’s $95 billion default in 2001, including billionaire Paul Singer’s NML Capital Ltd. and Aurelius Capital Management LP, would likely be the best scenario for investors.
“Most importantly it would allow Argentina to regain access to international credit markets,” said Mauro Roca, a senior Latin America economist at Goldman Sachs Group Inc. in New York. “It would ease pressure on the peso and increase international reserves.”
The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries would shrink to as low as 3 percentage points from about 6.5 percentage points currently, according to Diego Ferro, the co-chief investment officer at New York-based Greylock Capital Management LLC.
The drop in borrowing costs would prompt companies and provinces to sell as much as $2 billion in bonds, the biggest issuance boom since 2010, according to Federico Tomasevich, president of Puente Sociedad de Bolsa SA, the country’s biggest sub-sovereign underwriter.
The scope of the deal is critical. Settling just with the creditors involved in the lawsuit would leave the country vulnerable to claims from other holders of defaulted debt.
Any solution will also have to prevent investors who turned in their defaulted bonds in 2005 and 2010 exchanges from demanding the same terms, Ferro said. The Rights Upon Future Offers clause in the bond contracts, which expires Dec. 31, prevents the nation from voluntarily improving terms for the holdouts without making the same offer to exchange bondholders. Argentina says that could cost $120 billion.
If the country can avoid triggering the RUFO clause, Argentina could pay total potential claims from defaulted bondholders of between $11 billion and $12.5 billion, Roca said. The compensation would likely be a combination of cash and new securities to preserve reserves at the central bank, he said.
2. Court Issues a Stay on Ruling as Negotiations Continue
A suspension of the court ruling would allow officials to continue making payments on its performing bonds while giving them more time to seek an accord with holdouts.
A delay in the ruling until year-end “would eliminate the risk of the RUFO clause, and the market would start pricing in a greater chance of a settlement,” Roca said. “It’d be very positive for the credit and would open a window in the market for corporate and provincial issuance.”
The federal government probably won’t be able to issue new bonds before a final settlement, he said.
Argentina asked for a stay of the ruling at meetings this month with court-appointed mediator Daniel Pollack in New York.
Elliott Management Corp., the parent of NML, said it would support a way for Argentina to keep paying restructured notes if there have been concrete steps toward a solution by the end of the grace period. Aurelius said July 14 that the country is “wholly undeserving of another stay.”
3. Argentina Can’t Reach a Deal, Court Doesn’t Grant Stay
Argentina would default on its 2033 bonds if it can’t reach a deal or win a stay, sparking a selloff from the current 88.3 cents on the dollar, according to Stuart Culverhouse, the global head of research at Exotix Partners LLP in London.
“It’s the least-expected scenario,” Culverhouse said.
Opinions vary on just how steep the decline would be. Culverhouse says the notes could fall to 50 cents on the dollar. Ferro and Siobhan Morden, the head of Latin America strategy at Jefferies Group LLC, say the bonds would drop to about 60 cents. Alejo Costa, a strategist at Buenos Aires-based brokerage Puente Sociedad de Bolsa SA, estimates a price near 76 cents.
The government’s first step might be asking bondholders to swap their securities for notes covered by local law, which aren’t subject to the U.S. court ruling. Argentine officials raised the possibility of offering the exchange after the Supreme Court refused in mid-June to hear its appeal of the case.
If Argentina defaults, economic growth will slow and dollar outflows will rise, according to Roca.
“It would be wrong from their political thinking to assume that it’s better to default and then negotiate,” Culverhouse said. “With a default you’ve got all the corporates going bankrupt, you’ve got recession, higher unemployment, inflation, the currency falling; that’s not a position of strength.”