Argentine Bond Swap More Dream Than Real for KBC

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Argentina’s plan to pay holders of foreign bonds from local accounts looks doomed to fail even before it gets off the ground given concern that investors who participate could be held in contempt of a U.S. court ruling, according to KBC Asset Management SAD and JPMorgan Chase & Co.

“This might be a dream for Argentina,” said Olivier De Timmerman, an emerging-market portfolio manager at KBC in Luxembourg. “I am quite doubtful that this will go into something concrete because I don’t think current holders would like to be in contempt of a U.S. court. This will be a lengthy process and it will be quite messy.”

Bonds fell the most in two weeks today after President Cristina Fernandez de Kirchner announced a plan last night that is in direct conflict with orders by U.S. District Judge Thomas Griesa that forbid such a transaction. Her proposal, which also would let overseas debt holders swap into new dollar-denominated bonds governed by domestic law, aims to sidestep a ruling by Griesa that the nation must pay $1.5 billion to holders of debt defaulted on in 2001 or reach a settlement before resuming payments on restructured notes.

Analysts and investors at BNP Paribas SA, Credit Suisse Group AG, JPMorgan, Adelante Asset Management Ltd. and Fideuram Asset Management all cast doubt on the chances of success for Fernandez’s proposal.

“Given NY court orders, financial intermediaries with U.S. footprints are unlikely to collaborate in the process,” Vladimir Werning, an economist at JPMorgan in New York, said in a note to clients.

Bond Limbo

The country’s benchmark restructured bonds due in 2033 fell 2.34 cents to 80.4 cents on the dollar as of 4 p.m. in New York. The peso weakened 0.5 percent to 8.3233 per dollar.

Holders of Argentina’s $30 billion of overseas bonds have been in limbo since Griesa blocked the nation’s attempt to pay $539 million in interest due by July 30. His ruling was intended to compel Argentina to negotiate with hedge funds led by billionaire Paul Singer’s Elliott Management Corp. that refused to provide debt relief by swapping bonds from the country’s 2001 default and successfully sued for full repayment.

On June 20, Griesa said that the nation is prohibited from paying the overseas bonds in Argentina. Any intermediaries assisting in the process could be sued for contempt of court, while investors who aren’t able to hold local bonds would have to sell their holdings.

Terms of the swap probably won’t be favorable to holders of longer-dated debt, but restructured notes due in 2017 should be “pretty easy to swap,” said Jim Craige, who helps oversee $65 billion of assets at Stone Harbor, including the Argentine notes due in 2017.

Flouting Orders

Stephen Spruiell, a spokesman for New York-based Elliott, declined to comment. Aurelius Capital Management LP, another plaintiff in the case, said Fernandez’s proposal is further evidence that the government is choosing to flout the law.

“They have chronically flouted U.S. court orders, lied to our courts, and proclaimed utter disdain for our courts,” Aurelius said in a statement. “These officials are now ‘doubling down’ on an illicit and failed approach.”

Holders of bonds governed by New York law are unlikely to want to particulate in a swap, according to Emanuele Del Monte, who helps oversee $1.7 billion in assets as money manager at Fideuram Asset Management in Dublin.

“The swap that Argentina wants to propose does nothing to normalize the relationship between the government and investors,” he said in an e-mail. “It’s going to be very difficult to execute the exchange.


There’s too little information about the swap to know if it’s a good deal for bondholders, Gabriel Torres, an analyst at Moody’s Investors Service, said in a telephone interview. John Piecuch, a spokesman at Standard & Poor’s, declined to comment.

Daniel Pollack, a court-appointed mediator for talks between Argentina and the holdouts, declined to comment on Argentina’s plan.

U.S.-based investors may be wary of taking part in the swap over concern they will be held in contempt of court, according to Casey Reckman, an economist at Credit Suisse.

Economy Minister Axel Kicillof said today the bill’s main objective is to change the payment location rather than change legislation. Bondholders will find ways to receive their money via the account in Buenos Aires, he said.

‘‘No one’s going to have to take a plane,” Kicillof told reporters. “These days even your gas and electricity bills can be paid by the Internet. We’re not going to have an influx of bond tourists coming to get paid.”

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