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Repsol-JPMorgan Ignites Deepest Bond Selloff: Argentina Credit

Repsol SA Chief Financial Officer Miguel Martinez
While Repsol Chairman Antonio Brufau had said in February that it might take two years to sell the bonds, Chief Financial Officer Miguel Martinez, seen here, said May 8 that the company might sell them sooner if there was “a window of opportunity.” Photographer: Andrew Harrer/Bloomberg

When Repsol SA Chief Financial Officer Miguel Martinez received $5 billion of bonds from Argentina as compensation for its seized stake in oil producer YPF SA, he said it could take as long as two years to sell.

Instead, he unloaded them in two weeks.

With Repsol disposing of the final $190 million of bonds to JPMorgan Chase & Co. on May 23, the extra supply spurred the biggest rout in emerging markets as the nation’s dollar notes fell 3 percent last week. Debt due in 2024, which the country issued to pay Repsol, lost 1 cent to 88.14 cents, pushing up yields to 10.8 percent.

The deluge is depressing prices and boosting borrowing costs at a time when demand in one of this year’s best-performing bond markets is waning. Investors are shifting out of Argentina before the U.S. Supreme Court’s decision on whether to review its legal dispute with disgruntled creditors from its 2001 default, which may come as soon as next month, according to Alejo Costa, a strategist at Buenos Aires-based brokerage Puente Hnos Sociedad de Bolsa SA.

“While there was demand for Argentine bonds in the previous couple of months, such a large amount in so little time took the market off guard,” Costa said in a telephone interview from Buenos Aires. “Investors weren’t willing to take on so much new debt so close to a U.S. Supreme Court decision, which may cause a default.”

Opportunity Window

With the sale, Repsol cut ties with the government, which nationalized its 51 percent stake in YPF in April 2012. Repsol sold all of the bonds to JPMorgan and disposed of its 12 percent stake in YPF for $1.3 billion.

While Repsol Chairman Antonio Brufau had said in February that it might take two years to sell the bonds, Martinez said May 8 that the company might sell them sooner if there was “a window of opportunity.”

“The market gave us a good enough offer that we chose to take the first available window,” Repsol spokesman Kristian Rix said by telephone from Madrid.

The U.S. Supreme Court may decide next month whether to take Argentina’s case against holdouts or ask for the Solicitor General’s opinion.

If the justices decline to review the case, the lower court’s ruling that Argentina must pay $1.4 billion to holdouts whenever it pays performing debt would be upheld.

Supreme Court

Argentina has said it wouldn’t voluntarily comply with the lower court’s ruling, and President Cristina Fernandez de Kirchner unveiled plans to swap holders of foreign-law debt into securities governed by local legislation.

Argentina sent a written presentation today requesting that the U.S. Supreme Court consider overturning the lower court rulings, according to an e-mailed statement from the Economy Ministry.

There won’t be enough demand for Argentine securities if New York-based JPMorgan continues to sell the bonds it purchased from Repsol, according to Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group LLC.

JPMorgan sold part of the 2024 securities for about 86.75 cents on the dollar two weeks ago, according to two people familiar with the transactions. The bonds fell 0.78 cent to 87.52 cents at 5:38 p.m. in Buenos Aires, according to data compiled by Bloomberg.

JPMorgan press official Veronica Espinosa declined to comment on the sale of Argentine bonds.

New issuance is “difficult to absorb for a distressed credit with local-law jurisdiction,” Morden wrote in a May 23 report. “It will become increasingly difficult to absorb the bonds if they cannot be supported from the intermediary.”

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