Singer Piling Up Legal Victories Sinks Bonds: Argentina Credit

Argentina’s dollar bonds are extending the steepest losses in emerging markets after a U.S. appeals court rejected a request to rehear a case against holders of defaulted debt, increasing the likelihood the government will lose the battle.

The government’s $3 billion of bonds due 2033 that were issued in the country’s 2005 debt restructuring fell 0.74 cent to 53.33 cents on the dollar at 3:12 p.m. in New York, the lowest on a closing basis since Nov. 26, according to data compiled by Bloomberg. The cost to protect Argentina against non-payment over the next five years with credit-default swaps rose 77 basis points, or 0.77 percentage point, to 3,206 basis points, according to CMA Ltd.

The pressure on Argentina to pay so-called holdouts from a restructuring after a record $95 billion default in 2001 has never been greater. A decision yesterday by the U.S. Court of Appeals in Manhattan leaves in place an Oct. 26 ruling that compels the nation to repay investors including billionaire Paul Singer’s hedge fund Elliott Management Corp. when making payments on restructured debt. Bonds fell on concern Argentina will opt to cease payments on all of its debt if the court, in a related appeal, forces Argentina to pay holdouts in full.

“Argentina’s strategy for many years has been to prolong the process, and this closes a door,” Diego Ferro, co-chief investment officer at Greylock Capital Management LLC, said in a telephone interview from New York. Ferro’s firm oversees more than $500 million in emerging-market bonds, including Argentine debt, and is not involved in the litigation. “Argentina’s case is lost. The question now is how much they have to pay.”

Supreme Court

The question of the equal treatment of creditors, known as pari passu, can now only be debated further by the U.S. Supreme Court, the highest federal appeals court, which is unlikely to consider the case because the ruling is based on New York State contract law, Ferro said.

Norma Madeo, a spokeswoman for the Economy Ministry, declined to comment on the appeals court decision.

Argentina’s average borrowing costs rose 30 basis points yesterday to 14.88 percent, three times the average for developing-nation bonds in JPMorgan Chase & Co.’s EMBI Global index and the highest of 55 developing nations after Belize. This year, Argentine bonds have lost 18 percent, the worst performance in JPMorgan’s index.

The extra yield investors demand to own Argentine bonds instead of Treasuries widened 20 basis points to 1,313 basis points, according to JPMorgan.

‘Not Good’

“It is certainly not good news for Argentina,” Guillermo Nielsen, Argentina’s former finance secretary who oversaw the 2005 exchange and now works as a consultant in Buenos Aires, said in an e-mail. “With more judges involved, the chances of changing the ruling are higher. Nobody sees the three judges already involved writing a new ruling contradicting, even softly contradicting, their previous orders,” he wrote.

The decision also goes against a request by the U.S. government, which in December filed a friend-of-the-court brief supporting Argentina’s request for a rehearing, citing concern about its assets and foreign relations.

In October, the three-judge panel of the appeals court affirmed a decision by U.S. District Judge Thomas Griesa that a pari passu clause in the original bond agreements prevents Argentina from treating holders of defaulted bonds less favorably than the holders of the restructured bonds. The appeals court also said Griesa may bar Argentina from servicing restructured debt without also making payments on the defaulted bonds.

Payment Proposal

Following an oral argument on Feb. 27, the court asked Argentina to provide a suggested payment formula by March 29 since the nation’s lawyer “appeared to propose” an alternative to the formula devised by the lower court.

In November, Griesa, an 82-year-old judge who has been involved in the case for a decade, said Argentina must pay the entire $1.3 billion claimed by the defaulted-bond holders in principal and past due interest.

The country claims that a ruling forcing it to pay creditors who hold defaulted bonds would open it up to more than $43 billion in additional claims it can’t pay and trigger another default.

In the hearing last month, the nation’s attorney, Jonathan Blackman, said Argentina would offer holdouts the same terms as the ones rejected in the previous 2005 and 2010 swaps, which imposed a loss to investors of about 70 cents on the dollar. Argentina will have to be willing to negotiate a better offer to keep the court from upholding the lower court ruling, according to Joe Kogan, the head of emerging-market debt strategy at Scotia Capital Markets.

‘Other Ways’

“They start offering something low but signal to the court that they’re willing to pay more,” Kogan said in a telephone interview from New York. The so-called en banc rehearing to a larger group of appellate judges “was always such a long shot. I don’t think it should matter much. There are other ways out. Some that are more likely to materialize, some less likely.”

Kogan said Argentina could offer new par bonds due 2038 that have a higher coupon than those offered in the previous debt swaps of 2.5 percent. He recommends investors make a short-term bet on Argentine bonds and buy after yesterday’s losses.

While Argentina can still file a petition for an en banc rehearing on the outcome of the payment decision, full-court re-hearings are granted by the New York-based appeals court in only about 0.03 percent of cases from 2000 to 2010, according to a 2011 study by the Federal Bar Council.

‘Trade Reactively’

Volatility in Argentine bonds since the appellate court’s decision in October has more than doubled from the degree of prices swings in the six months prior, according to Bloomberg’s Riskless Return index. The nation’s debt securities have posted the worst losses in emerging markets in two consecutive quarters, dropping 20 percent in the period.

“There’s sensitivity to negative headlines and a knee-jerk reaction of selling first and asking questions later because of the complexity of the case,” Siobhan Morden, the head of Latin America fixed income strategy at Jefferies Group Inc., said in a telephone interview from New York. “You’re forced to trade reactively because it’s too difficult to predict the outcome.”

The lower court case is NML Capital Ltd. v. Republic of Argentina, 08-06978, U.S. District Court, Southern District of New York (Manhattan). The appeal is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (New York).

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