As a U.S. judge makes life harder for Argentina, the country’s biggest province is proving to be the biggest beneficiary.
U.S. District Court Judge Thomas Griesa’s March 12 decision to extend a ruling that prohibits the nation from paying its bonds is prompting investors to buy those issued by Buenos Aires. At 9.96 percent, its $1.05 billion of notes due 2015 now yield just 0.89 percentage points more than government debt. Before the ruling, the premium was 3.4 percentage points.
The shift reflects bond investors’ latest move to protect themselves against an ever-expanding ban on Argentina’s ability to honor debt obligations until it settles with disgruntled creditors from a default in 2001. After blocking Argentina from making payments on foreign-currency exchange bonds in July, Griesa is now preventing the country from paying dollar-denominated notes issued locally as part of debt restructurings.
“Buenos Aires is the best choice for a credit in Argentina,” said Gabriele Bruera, an emerging-market money manager at Compass Asset Management, which owns the province’s bonds.
Buenos Aires province bonds are a good investment because they’re shielded from Argentina’s legal issues, while being “close enough to the sovereign” in risk since it’s the biggest province in the country, accounting for half of gross domestic product, Bruera said.
Argentina’s peso was little changed Tuesday at 8.8582 per dollar as of 12:16 p.m. in New York.
Bonds from Buenos Aires due have gained 3.2 cents this year to 100.79 cents on the dollar, while similar-maturity government bonds fell 0.28 cent to 99.38 cents on the dollar. The province’s debt due 2021 is also outperforming government bonds of the closest maturity.
Yields on Argentina’s dollar notes due 2015 have jumped 0.8 percentage point in the past month to 8.9 percent. The nation had been able to make payments on all its local-law securities while being in default on its overseas debt.
That changed after Griesa’s March 12 ruling, which stems from a decade-long legal tussle between Argentina and creditors who rejected the nation’s restructuring after the 2001 default. The holdouts, led by billionaire hedge fund-manager Paul Singer, have won the right to full repayment in court.
Bond investors are now concerned Griesa may try to expand the reach of his ruling even further to local dollar debt that Argentina has issued independently from its debt swaps, said Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies LLC. Those securities account for 21 percent of the nation’s local dollar debt.
“The local sovereign bonds are re-pricing for legal risks and higher repayment risk,” she said in an April 10 report, in which she recommends owning Buenos Aires province bonds, as well as local-law bonds due 2017 and 2024.
In addition to being free of any legal restrictions on its ability to repay debt, Buenos Aires also boasts better finances than the federal government. While the province recorded a budget surplus for the second straight year in 2014, Argentina itself posted its biggest deficit on record.
Buenos Aires also retains access to overseas debt markets, while Argentina hasn’t borrowed internationally since 2001.
The province has “better financial conditions,” Compass’s Bruera said.