With Standard & Poor’s saying Argentina is in default and last-minute plans to remedy the situation falling through, investor focus is turning to whether holders of $29 billion of bonds will demand immediate repayment.
The nation missed a deadline yesterday to pay $539 million in interest after two full days of negotiations in New York failed to produce an accord with creditors from its last default in 2001. A U.S. judge ruled that the payment couldn’t be made unless those investors, a group of hedge funds led by Elliott Management Corp., got the $1.5 billion they claimed.
As Economy Minister Axel Kicillof returns to Buenos Aires with no set plans for further discussions with the hedge funds he described as “vultures,” other creditors must decide whether to invoke a clause that entitles them to demand their money back. While an 11th-hour attempt last night by a group of Argentine banks to avert a crisis by purchasing the securities from Elliott fell through, bondholders probably will give the parties more time to reach a settlement, according to Bank of America Corp.
“It’s in their best interest to delay acceleration and not introduce more difficulties,” Jane Brauer, a strategist at Bank of America, said by phone from New York. “The best thing for Argentina to do is to continue seeking a solution.”
Argentina has about $29 billion of bonds sold in international markets and denominated in foreign currencies with so-called cross-default provisions. Under their terms, Argentina would have to pay back the entire balance -- plus unpaid interest -- if at least 25 percent of holders demand that their money be returned. The potential liabilities are equal to the country’s foreign reserves, which are already hovering close to an eight-year low.
S&P’s declaration came after the expiration yesterday of a 30-day grace period on the original June 30 payment deadline. If Argentina is able to figure out a way to make its debt payments, the ratings could be revised “depending on our assessment at that time of Argentina’s residual litigation risk, its access to international debt markets and its overall credit profile,” S&P said.
“If there is a hint of a potential deal, bondholders will not be incentivized to accelerate,” Patrick Esteruelas, senior analyst at Emso Partners Ltd., a money-management firm specializing in emerging markets, said in an e-mail.
The price of Argentina’s $4.3 billion of bonds due in December 2033 soared yesterday by 11.8 percent to 95.57 cents on the dollar, the highest level since 2010. The bonds were quoted at 95.89 cents today, according to prices on Bloomberg at 11:08 a.m. in London.
“The price action suggests the market thought the deal with Argentine banks was possible, or that there would be an 11th-hour breakthrough with holdouts,” Kevin Daly, who helps oversee $13 billion of emerging-market debt at Aberdeen Asset Management Plc in London, said by e-mail today. “This looks like it could now drag out until 2015. The risk is that it gets pushed out further, or you get an acceleration demand by an exchange bondholder that adds a new wrinkle to the holdout quandary.”
Argentina’s bonds in the U.S. are likely to erase yesterday’s gains, according to Morten Groth, who helps manage about $1.5 billion in debt at Jyske Bank A/S in Silkeborg, Denmark.
“While the market is optimistic that a solution will be found in the next few days, execution risk is higher than that during the pre-default situation,” Emiliano Surballe, a fixed-income analyst at Bank Julius Baer in Zurich, said in e-mailed comments. “Now, Argentina might not only have to negotiate with holdouts, it might have to reach an agreement with the holders of sovereign debt” that have just been defaulted on, he said.
Kicillof, speaking late yesterday at the Argentine consulate in New York, told reporters that the holdouts rebuffed all offers and wouldn’t endorse a stay of the court ruling that would have allowed more time for talks.
Elliott’s NML unit said in an e-mailed statement that Argentina refused to seriously consider a court-appointed mediator’s “numerous creative solutions” for resolving the dispute. NML said it found many of those options acceptable.
Daniel Pollack, the mediator, wrote in his own e-mailed statement that “real people” are likely to suffer because of Argentina’s default.
“The full consequences of default are not predictable, but they certainly are not positive,” Pollack wrote.
The economy, already headed for its first annual contraction since 2002 amid 40 percent inflation, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump, according to Hernan Yellati, the head of research at Banctrust & Co.
The country hasn’t been able to access international credit markets since its $95 billion default 13 years ago. Credit-default swaps to protect against losses from an Argentine default over the next three months had become the most expensive in the world yesterday, according to data compiled by CMA. The five-year contracts were quoted at a cost of $3.1 million plus $500,000 a year to insure $10 million of debt, CMA reported at 11 p.m. in London yesterday.
About $1 billion of Argentine sovereign debt is covered by the contracts, compared with $10 billion of Russian government obligations and $16 billion of Brazilian debt. The International Swaps & Derivatives Association is responsible for determining if a credit event has taken place to trigger payment to the holders. That decision would be taken by the association’s Determinations Committee, a group of 15 dealers and investors, only after a ruling has been requested by a trader.
Kicillof told reporters that the judge in the case was unfair and criticized ratings companies, saying it didn’t make sense that the country was declared in default since it posted money to make the interest payment.
“Argentina paid, Argentina has money, and we’re going to keep making our future debt payments because we want to,” Kicillof said.
He said Argentina couldn’t pay the $1.5 billion verdict to the hedge funds because doing so would require the country to similarly sweeten terms for investors who went along with the country’s debt restructurings in 2005 and 2010 and got 30 cents on the dollar. That stipulation, known as the RUFO clause, could trigger claims of more than $120 billion, the country has said.
The government will probably wait until the RUFO clause expires before striking a deal with the hedge funds at the beginning of next year, according to Bulltick Capital Markets.
“In the worst-case scenario, this probably will be fixed in the next six months,” said Alberto Bernal, head of research at Bulltick. “Argentines need the money, they need to come back to the market, and the holdouts want to get paid.”
Sebastian Palla, head of investment banking at Banco Macro SA in Buenos Aires, yesterday presented a proposal from members of the local banking association Adeba to buy the holdouts’ defaulted bonds, according to a bank official who asked not to be identified because she isn’t authorized to speak publicly about the plans.
Those talks also ended without an agreement because the banks were unable to devise a solution for a wider group of holdout creditors, according to the official. Ambito Financiero, a Buenos Aires-based daily, said discussions with officials from other Argentine banks and private companies would continue in New York today in a bid to reach a deal.
Kicillof, who estimated total holdout claims at $15 billion to $20 billion, said it wouldn’t surprise him if such a private solution arose since many investors have an interest in resolving the battle.
In the past year, Argentina has taken steps to restore its standing with international creditors. Those include paying $5 billion in government bonds to the Spanish oil company Repsol SA to compensate it for the seizure of a local unit, as well as reaching an agreement with the Paris Club of creditors to settle $9.7 billion of debt. The country also changed its methodology for calculating inflation statistics after being faulted by the International Monetary Fund for flawed reporting.
Missing the debt payments represent a step backward in those efforts, according to Marco Santamaria, a New York-based money manager at AllianceBernstein, which oversees $25 billion of emerging-market debt. Argentina hasn’t issued global bonds since the default in 2001.
“A lot of the goodwill and positive signals that had come out of Buenos Aires are going to be diluted,” he said.