Argentina Rating Cut by Moody’s on Default Risk From Court Case

Moody’s Investors Service downgraded Argentina’s foreign bonds to seven levels below investment grade, as a U.S. court case with holdout creditors increases the chances the country will default.

The rating on government securities under foreign legislation was cut to Caa1 from B3 while the rating on the country’s local law bonds were affirmed at B3, Moody’s said in an e-mailed statement today. The outlook on both ratings is negative. The Caa1 rating is in line with Cuba, Ecuador and Pakistan.

While the country has the capacity to meet its debt obligations, “the government has repeatedly stated that it would not pay litigating bondholders in full,” Moody’s analysts Gabriel Torres and Bart Jan Sebastian Oosterveld wrote. “Today’s rating action reflects the risk that the final court ruling will result in some delay or loss to restructured foreign-law debt bondholders.”

The U.S. appeals court on Oct. 26 upheld a ruling by District Court Judge Thomas Griesa that Argentina must pay holders of defaulted debt whenever it pays performing bonds. The U.S. appeals court asked Argentina to propose a payment formula by March 29 as part of a review of a ruling ordering the country to pay holdout creditors, including billionaire hedge fund manager Paul Singer, $1.33 billion.

Speculation South America’s second-biggest country will default for the second time in 12 years rose after Argentina said in a Feb. 27 court hearing the nation would halt payments on its restructured debt before giving into holdouts who refused to accept prior renegotiations. Moody’s said that potential liabilities from investors holding defaulted debt could rise to $12 billion.

Bonds Fall

Argentina defaulted on a record $95 billion in 2001 and offered investors new securities as part of restructurings in 2005 and 2010 at discounts of about 70 percent. Argentina says about 92 percent of investors participated in the debt swaps.

Phone calls to the Argentine Economy Ministry seeking comment on the downgrade went unanswered. Norma Madeo, a spokeswoman at the ministry, didn’t immediately return an e-mail.

Yields on Argentina’s New York law bonds due 2017 rose 21 basis points to 16.46 percent at 1:39 p.m. New York time. The price fell 0.51 cents to 77.23 cents on the dollar.

The cost to protect Argentine debt against non-payment over the next year using credit-default swaps surged 275 basis points to 6,885, according to data compiled by Bloomberg. That’s the highest in the world and implies a 61 percent chance of default over the next 12 months.

“People get nervous with headlines but nothing has really changed, the conditions in Argentina have been clear for a while,” said Diego Ferro, co-chief investment officer at Greylock Capital Management LLC in a phone interview from New York. “It’s mystifying to me that the rating would be cut to such a low level for something that hasn’t happened yet.”

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