Argentina is offering to swap holders of New York-law bonds into debt governed by local legislation as investors shift into the notes after a U.S. court sided with creditors seeking full repayment on claims from the nation’s record default in 2001.
The move comes after the Aug. 23 ruling, which prompted dollar-denominated local law bonds due 2017 to rally and yield 3.95 percentage points less than similar-maturity notes issued under New York rules yesterday. The gap grew to within 0.11 percentage point of the record 4.06 percentage point difference April 3. At 11.85 percent, the local-law debt yielded twice the emerging-market average, according to JPMorgan Chase & Co.
Faced with the prospect of paying the holdout creditors in full or risking a second default in 12 years, President Cristina Fernandez de Kirchner said in a national address yesterday she will offer a third swap at the same terms to owners of defaulted debt who rejected previous exchanges, as well as to holders of the restructured notes. The proposal is aimed at circumventing the U.S. court ruling without reneging on payments to the New York-law bondholders.
“There was always the expectation that if Argentina couldn’t win in court, it would find anther way to get its way, for example, by re-routing payments,” Diego Ferro, co-chief investment officer at Greylock Capital Management, which oversees $500 million in emerging-market debt including restructured Argentine bonds, said in a telephone interview. “It’s a predictable patch solution that in the end guarantees that dollar debt will be paid.”
Greylock hasn’t decided whether it’ll accept the debt swap into local law, Ferro said.
Argentina’s proposal trigged declines in the local-law bonds today. The dollar securities due 2017 fell the most in four months, plunging 2.88 cents to 85.26 cents on the dollar at 2:09 p.m. in New York. Dollar notes due 2017 sold under New York law tumbled 1.73 cents to 78.43 cents on the dollar.
The appeals court on Aug. 23 said it would delay the effect of its ruling until the U.S. Supreme Court decides whether to review the case, which may not come until the first quarter of 2014, according to law firm Shearman & Sterling LLP. The stay would be lifted if the Supreme Court doesn’t take the case putting subsequent bond payments in jeopardy of default since Argentina has said it won’t obey the court orders to pay creditors Fernandez has dubbed “vultures.”
The debt swap would be offered into local law debt in the same terms and currency as original bonds, according to Fernandez.
“Instead of recalcitrant debtors, we are serial payers,” Fernandez, 60, said in her speech, adding that the country has paid about $174 billion in debt since 2003. “The ruling ignored the country’s accords reached with 93 percent of holders of defaulted debt.”
She also said the ruling invalidates future debt restructurings and asked God to “illuminate” the U.S. high court.
The changing of jurisdiction on performing debt governed by international law will be voluntary and dependent on the outcome of the nation’s request for the Supreme Court to take their case, a government official, who isn’t authorized to speak publicly about the plans, said in an interview. The re-opening of the swap is intended to show the Supreme Court the nation’s willingness to pay, he said.
The Supreme Court grants only one percent of about 8,000 petitions it receives every year.
“This is the most pragmatic thing they could have done,” said Alberto Bernal, head of fixed-income research at Bulltick Capital Markets in Miami. “It’s good news for bonds because it shows total willingness to pay, even if Argentina is trying to circumvent U.S. courts.”
Banks from Credit Suisse Group AG to Barclays Plc say that investors should buy local-law bonds, which are exempt from the court orders, as default risk for debt sold abroad increases after Argentina’s appeal was rejected.
“We recommend only the shortest local-law bonds in Argentina,” said Daniel Chodos, a strategist at Credit Suisse, said in a telephone interview from New York, referring to dollar notes due 2013 and 2015. “The ruling states that the order is for the exchange bonds, which were sold under foreign law, so local law bonds shouldn’t be involved.”
Investors will probably switch to the 2015 bonds after the government pays $2 billion of principal on the 2013 bonds next month, giving the longer notes additional support, Chodos said.
“Nobody in their right mind would resign New York protection for Argentine law,” Jorge Piedrahita, chief executive officer of Torino Capital LLC in New York, said in an e-mail. “Payments would be easily embargoed by Elliott and there’s the risk of having to get the money out of Argentina.”
Argentina in 2001 defaulted on a record $95 billion of foreign debt. Holders of about 91 percent of the bonds agreed to take new exchange bonds in 2005 and 2010, at about 30 cents on the dollar. Creditors including billionaire Paul Singer’s Elliott Management Corp. have rejected the swaps.
Fernandez last week reassured bond investors that she won’t change terms on securities sold under Argentine legislation after the central bank set aside $2.3 billion for debt payments this year, of which $2 billion are for local law.
“It’s an important message to the international community because we are paying local-law maturities,” she said in an Aug. 21 speech. “We haven’t changed the terms in local law debt in 10 years and won’t start to.”
Argentina’s vow to continue paying performing bonds regardless of the court ruling had spurred speculation the government will change legislation of its New York-law exchange bonds to a jurisdiction outside the U.S.
The extra yield investors demand to own Argentine bonds over U.S. Treasuries widened 33 basis points, or 0.33 percentage point, to 1,108 basis points today, according to JPMorgan Chase & Co. data.
Argentina’s five-year credit default swaps, contracts insuring the nation’s debt against non-payment, rose 265 basis points to 2,745 basis points at 2 p.m. New York time, according to data compiled by CMA Ltd. The peso fell 0.2 percent to 5.6427.
Still, the fastest decline in central bank reserves since 2001 is spurring concern Argentina will pay its local law bonds in pesos, a process known as “pesofication.” The fair value of Argentine government bonds due 2015, called Boden 15, is 87.2 cents per dollar, compared with yesterday’s price of 95.15, according to an Aug. 9 Citigroup Inc. report.
Argentina has $15.3 billion of dollar debt due by the end of 2015 including interest, compared with $36.9 billion of reserves as of yesterday. Reserves are on track to fall to $25 billion by the end of 2015, according to Citigroup.
South America’s second biggest economy will have enough foreign currency funds to continue making payments on dollar bonds in the next three years, Barclays Plc analyst Sebastian Vargas said in a telephone interview from New York.
“We’re keeping our market weight position and reiterating our recommendation to buy Boden 15,” Vargas said. “Instead of pesofying you could simply not even pay a dime and kick the payments five years down the road. Why would you pesofy? Instead of pesofying you would simply forcibly restructure debt, but that is not in the cards.”