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Defaulted Bondholders Undeterred as Gains Hold: Argentina Credit

Hedge Fund Manager Paul Singer
While Argentina managed to push back a court-ordered payment on defaulted debt this month, creditors led by hedge fund manager Paul Singer’s NML Capital Ltd. suing the South American country remain confident the nation’s arguments won’t undo their biggest victory during the 11-year legal battle. Photographer: Jacob Kepler/Bloomberg

Argentine defaulted bond traders are sticking to bets that they’ll be paid even after a U.S. court delayed an order forcing the South American country to make a $1.33 billion payment.

Euro bonds that the government defaulted on in 2001 have jumped about 7 cents since a U.S. appeals court ruled Oct. 26 the nation must pay creditors that rejected restructuring offers if it wants to service performing debt held by investors who accepted discounts of 70 percent. The notes trade in a range between 25 cents to 26 cents, the highest since the ruling, Amir Zada, managing director at Exotix USA Inc., said. Exotix doesn’t keep historical price data for the securities, he said.

While Argentina managed to push back a court-ordered payment on defaulted debt this month, creditors led by hedge fund manager Paul Singer’s NML Capital Ltd. suing the South American country remain confident the nation’s arguments won’t undo their biggest victory during the 11-year legal battle.

“Those that hold the defaulted debt are closer to getting paid than they ever have been in the last 10 years,” Russell Dallen, the head bond trader at Caracas Capital Markets, said in a telephone interview from Miami. “The courts have already ruled that Argentina owes them the money. Although Argentina won the stay, it doesn’t mean they’ve won the battle, much less the war.”

Yields Drop

Defaulted bonds have maintained their gains even as Argentina’s restructured securities rallied, returning 18.6 percent since the appeals court on Nov. 28 delayed District Judge Thomas Griesa’s orders for the nation to pay holders of defaulted debt in full this month. While the rally shows holders of performing securities are growing more confident the country will service the debt, defaulted bond prices indicate creditors including Singer aren’t losing confidence they’ll be repaid.

The court said Argentina will present oral arguments Feb. 27.

The average yield on government dollar bonds has fallen 90 basis points in the past week to 12.54 percent. It surged to a three-year high of 15.08 on Nov. 28 on speculation that Argentina would default again rather than settle with holdouts.

Argentine securities tied to the nation’s economic growth jumped a record 2.2 cents on Nov. 29. The GDP warrants, whose Dec. 15 coupon payment of about $3 billion was most at risk of being disrupted by Griesa’s order to deposit $1.33 billion in an escrow account for the so-called holdouts by that date, have extended their rally to 12.19 cents yesterday, the highest since Oct. 25.

Softening Stance

The appeals court decision to delay the ruling came after Argentina, holders of its restructured bonds and intermediary banks involved in channeling payments requested an emergency stay to block Griesa’s orders. In a Nov. 26 court filing, the South American government suggested for the first time that it would be willing to re-open a two-year-old restructuring to the owners of defaulted securities.

Argentina’s Economy Ministry said Nov. 26 that a payment formula offering holdouts the same terms as investors who accepted the 2010 restructuring, rather than par value as Griesa had ruled, would be a “remedy” that’s consistent with Argentine law and the government could present that proposal to Congress, according to the court filing.

Norma Madeo, a spokeswoman for the Economy Ministry, didn’t respond to an e-mail seeking comment on the possibility of reopening the debt swap or on the court case.

‘Compelling Arguments’

The proposal came after Griesa cited public comments by President Cristina Fernandez de Kirchner saying she wouldn’t pay the holdouts as one justification for lifting the stay. The change in Argentina’s tone may have contributed to the recent appeals court decisions that have been favorable to the nation, according to Hernan Yellati, the head of research and strategy at BancTrust & Co. in Miami.

“Argentina’s willingness to resolve the problem by trying to reopen the 2010 exchange may be seen with good eyes by the U.S. Court of Appeals,” Yellati said in an e-mail. “In addition to compelling arguments by holders of restructured debt, the NY Fed and BONY, the court should consider Argentina’s softening rhetoric toward plaintiffs. Yet, if Judge Griesa’s decision is ratified, paying in full to holdouts, as the ruling establishes, that is something President Fernandez won’t consider at that stage.”

The upfront cost of insuring against losses on $10 million of Argentine government debt for one year fell to $2.4 million yesterday in New York from $4.8 million on Nov. 27 in the credit-default swaps market, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Possible Negotiation

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

While a ruling whereby the court orders holdouts to accept the terms of another Argentine restructuring would be unfavorable to investors who had rejected swaps twice before, the prospect of a possible negotiation could also be contributing to the rally in defaulted bonds, according to Sebastian Vargas, an analyst at Barclays Plc.

“To the extent that the intransigence of the Argentine position has diminished, that certainly increases the value of restructured debt as well as defaulted debt,” Vargas said in a telephone interview from New York. “The chances of negotiation increase at the end of the stay. But it’s important to say that we’re at a very incipient stage and the administration has to walk the way it talks.”

Temporary Rebound

The extra yield, or spread, investors demand to hold Argentine debt over U.S. Treasuries widened 14 basis points to 1,090 basis points at 7:43 a.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.

The peso fell 0.1 percent to 4.8512 per dollar yesterday.

The recovery in restructured Argentine dollar bonds will be short-lived as the court will ultimately rule against the nation after arguments are presented in February, according to Dallen of Caracas Capital Markets.

“If I was getting paid in December, I would sell my position,” he said. “Argentina is in a losing position and ultimately they’re going to lose. They’re fighting a rearguard battle.”

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