Argentina Election Triggers Windfall for Provincial Bondholders

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Bondholders in Argentina are naturally focused on which presidential candidate will prevail at the ballot box in October. But for debt investors in Cordoba province, this month’s election is already proving to be a boon.

Juan Schiaretti, 66, emerged victorious in the race for governor of Argentina’s second-biggest province on July 5, fueling speculation he’ll end a dispute with the federal government that’s deprived Cordoba of much-needed financing. The province’s $596 million of notes due 2017 have jumped 2.3 percent since. That’s eight times the emerging-market average. And more gains are to be had, says Torino Capital.

Schiaretti has pledged to resolve lawsuits filed by his predecessor against President Cristina Fernandez de Kirchner’s administration for withholding funds. Cordoba, which is awaiting a ruling from the nation’s Supreme Court, gets 50 percent of its revenue from the federal government.

“We’re seeing the effect of Schiaretti’s election in the bonds,” Jorge Piedrahita, chief executive officer of Torino Capital, said from New York. “He will have a more open relationship, and that means the province of Cordoba will have access to more funding.”

Piedrahita recommends investors buy Cordoba’s notes on a wager that their yield premium over similar-maturity Argentina government bonds will decline another 0.5 percentage point this year. The spread has already shrunk to 2.7 percentage points from a four-month high of 3.1 percentage points on July 14.

Cordoba Lawsuits

Presidential palace spokesman Alfredo Scoccimarro didn’t return a message seeking comment.

Like Schiaretti, predecessor Jose Manuel de la Sota also belongs to Fernandez’s ruling party. But their relationship has been strained since de la Sota sued the federal government in 2013 over 5 billion pesos ($546 million) of transfers he said her government withheld.

Daniel Scioli, the front-runner in presidential elections, and Schiaretti are also members of the same party.

“The new president will be reasonable and we’ll resolve this issue,” Schiaretti said in an interview with newspaper La Voz published on June 28.

Yields on Cordoba’s notes have tumbled 1.4 percentage points from a four-month high of 12.6 percent on July 6, data compiled by Bloomberg show. Argentina’s peso has fallen 7.5 percent this year to 9.1506 per dollar as of 11:55 a.m. in New York.

Schiaretti may look to reach a deal with the federal government before the court rules on the lawsuits, according to Alejo Costa, a strategist at Puente Hnos Sociedad de Bolsa.

“That will certainly be part of the agenda looking forward,” he said. “Liquidity is an issue for the bond, but at a more fundamental level, the issue has been de la Sota’s relationship with the national administration. For buy-and-hold investors, it represents an attractive play.”

(The first paragraph of an earlier version of this story was corrected to show that the election was this month.)

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