Argentina’s $5 Billion Repsol Bond Sale Risking Supply Glut

Argentina’s accord with Repsol SA for the expropriation of its YPF SA unit may saddle bondholders with losses as the country prepares to sell at least $5 billion of notes to pay off the debt, risking a supply glut.

Repsol’s board agreed to accept bonds that the Spanish oil company can sell or hold until maturity, according to a filing to regulators yesterday. Argentina will issue at least $3.25 billion of new bonds due 2024 with an interest rate of 8.75 percent and pay the rest by selling more of its securities that mature in 2017 and 2033, the Economy Ministry said in a statement.

While the agreement to end the investment dispute is a positive development, bond prices for the securities already trading in secondary markets may fall when Repsol decides to sell the notes for cash, according Buenos Aires-based research firm Elypsis. Shorter-dated bonds may be hurt the most as those are worth more in the secondary market and will probably be sold first, said Eduardo Levy Yeyati, director at Elypsis.

“Given that Repsol has -- at least to our knowledge -- no particular interest in betting on Argentine bonds, sooner or later those bonds will arrive to the market,” Yeyati said in a telephone interview from Buenos Aires. “It’s a lingering possibility that as soon those bonds start to rally, a portion of them will be sold.”

Argentina hasn’t sold bonds in international credit markets since defaulting on a record $95 billion of debt in 2001. Dollar debt trading in secondary markets is a mix of restructured securities and bonds issued locally under Argentine law.

No Rush

Repsol isn’t in a rush to sell the bonds from its deal with Argentina, Antonio Brufau, the company’s chairman, said today in a web cast. The goal is to have cashed the bonds and sold Repsol’s remaining 12 percent stake in YPF in two years, he said.

Argentina will issue a maximum $6 billion of bonds at face value, which guarantees a minimum market value of $4.67 billion, according to yesterday’s filing. If Repsol sells the securities and makes more than $5 billion, it will return the surplus to Argentina.

Repsol will probably sell the bonds at an agreed-upon discount to intermediary banks, which will in turn sell them on the secondary market, Elypsis’ Yeyati said. Losses for Argentine bondholders will depend on the velocity with which those banks dump the notes, he said.

‘Worrisome’ Increase

The $6.9 billion outstanding of debt due 2017, which the government said will be increased by as much as $800 million, fell 0.1 cent to 84.36 cents on the dollar, at 11:08 a.m. in Buenos Aires. The $5.9 billion of bonds due 2015, which may be increased by as much as $400 million in the round of additional compensation, fell 0.26 cent to 95.39 cents.

The existing stock of tradable dollar debt will increase 11 percent because of the settlement, with a “worrisome” jump in near-term debt payments, Daniel Chodos, a strategist at Credit Suisse Group AG, wrote in a report yesterday.

Debt service to private creditors will increase by $1.4 billion between now and the end of 2015 and $3.1 billion through 2017, according to the report. Argentina’s foreign reserves used to pay debt have plunged 34 percent over the past 12 months to a seven-year low of $27.6 billion.

The agreement, which requires approval from shareholders and Argentina’s Congress, is less than the $10.5 billion in compensation Repsol initially sought. It also marks the end of two years of wrangling over the unit, which remained on the company’s books at full value until last week.

Repsol will drop as many as 31 lawsuits filed after the April 2012 takeover, Economy Minister Axel Kicillof said yesterday.

“The new bond supply is likely to pressure the sovereign curve,” Chodos wrote in the report. “The increase in near-term debt service is also worrisome, particularly in the context of Argentina’s limited financing flexibility.”

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