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Brady Bond Swap Paves Way for Dollar Offering: Argentina Credit

President Cristina Fernandez de Kirchner
President Cristina Fernandez de Kirchner is seeking to lower the third-highest borrowing costs among major emerging-market economies six months after restructuring $12.2 billion in defaulted loans. Photographer: Michele Tantussi/Bloomberg

Argentina’s offer to exchange $335 million of defaulted Brady bonds moves the government closer to selling international debt for the first time in a decade.

The yield on Argentina’s dollar bonds due in December 2033 slid to a one-week low of 9.23 percent yesterday. Warrants linked to gross domestic product rose to 13.73 cents, the highest since Nov. 10.

President Cristina Fernandez de Kirchner is seeking to lower the third-highest borrowing costs among major emerging-market economies six months after restructuring $12.2 billion in defaulted loans. The proposed swap would remove from the market the last of the debt issued in a 1990s restructuring and named after former U.S. Treasury Secretary Nicholas Brady.

“It’s a step forward,” said Daniel Marx, a former finance secretary who helped sell Argentina’s Brady bonds in 1993 and now runs Quantum Finanzas, a Buenos Aires-based research firm. “The Brady bonds have fulfilled their role.”

Argentina, which stopped making payments on $95 billion of bonds in 2001 in the largest-ever sovereign default, is offering to exchange the Brady debt for benchmark 2033 bonds, GDP warrants, dollar notes due in June 2017 and a cash payment.

The swap involves $263 million of dollar notes and 54.2 million euros of deutsche mark debt. The government listed the terms at

Accelerating Payment

The transaction would allow the country to accelerate the payment of debt originally due in 2023 as Argentina’s borrowing costs slump, the economy grows at the fastest pace in five years and foreign reserves climb to a record $52 billion.

The remaining Argentine Brady bonds use U.S. Treasuries and German debt as collateral, making them more expensive over time than sovereign debt, Marx said in a telephone interview from Buenos Aires yesterday.

The bonds were issued under the so-called Brady Plan in which 21 developing countries, including Poland, Brazil and the Philippines, restructured foreign debt they defaulted on after the Federal Reserve drove up U.S. interest rates in the 1980s. Argentina issued about $30 billion worth of Brady bonds.

“Brady bonds served a purpose at first, but once credit is re-established, it’s more convenient to retire them,” Marx said. “The plan from the first day was that they would be retired early.”

Legal Claims

Argentina is making the offer to “manage its external liabilities” and reduce the prospect of legal claims from creditors, the government said in a statement yesterday. The country is among a group of nations including Poland and Albania that still have Brady debt. Brazil tapped central bank reserves in 2006 to buy back its remaining $6.6 billion of the notes.

While Argentina previously exchanged the debt in 2005, Brady bonds were excluded from the June restructuring on concern creditors would use them as leverage to try to block a settlement, said Marx.

Sergio Poggi, an Economy Ministry spokesman, didn’t return a call to the press office seeking a comment.

The offer is more likely to help Argentina’s reputation among investors than improve its balance sheet, said Bret Rosen, a Latin America debt strategist at Standard Chartered Bank in New York.

‘Cleaning Up’ Debt Issues

“It’s not a huge amount” of money, said Rosen in a telephone interview from New York. “The Argentines have been clearly looking to essentially clean up a variety of different sovereign debt issues that they’ve had to deal with.”

Five-year credit-default swaps tied to Argentine debt slid 18 basis points today to 622. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

The peso fell 0.1 percent to 3.9797 per dollar.

The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries fell 31 basis points, or 0.31 percentage point, to 497 basis points, according to JPMorgan. That’s the highest among major emerging market economies after Venezuela and Ecuador.

South America’s second-biggest economy after Brazil also plans to start negotiations with the Paris Club group of creditor nations over about $7 billion next week, the Economy Ministry said.

Paris Club Talks

Economy Minister Amado Boudou will lead talks with the informal association, whose members include the U.S., Germany, Japan and Italy. Boudou said Nov. 24 that an agreement with the Paris Club would help companies lower borrowing costs and boost investment.

Argentina is also working with the International Monetary Fund to improve its inflation data amid concern that the nation’s consumer price reports are flawed. Prices are rising 26 percent annually, according to Buenos Aires-based research company Ecolatina, compared with the government’s estimate of 11.1 percent in the 12 months through October.

These steps along with the Brady offer will help Argentina in the long run, said Sara Zervos, who helps oversee about $10.5 billion in emerging-market assets including Argentine bonds at Oppenheimer Funds Inc. in New York.

“All of these things in isolation aren’t an enormous big deal, but when you add them up it means they are clearly trying to pave the way for borrowing abroad,” said Zervos. “That overall is bullish for Argentina and Argentine assets.”

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