New York-for-Buenos Aires Swap Theory Spreads: Argentina Credit

Argentina’s refusal to improve its offer to holders of defaulted debt suing for full payment in the U.S. is deepening speculation that the nation will sever ties with the overseas bond market.

The proposal submitted on March 29 mimics the terms of Argentina’s 2005 and 2010 debt exchanges, a move that could lead to a default on the restructured notes unless the country removes them from U.S. jurisdiction. While benchmark notes due 2033 sank as much as 2.5 cents to 51.8 cents on the dollar after Argentina made the offer, they’ve since recouped all their losses as investors bet that the government will swap them into debt governed by Argentine law.

Vice President Amado Boudou’s pledge on March 31 to pay restructured bondholders “no matter what” is adding to speculation the government is preparing contingency plans to keep servicing the debt as it heads toward an impasse with U.S. courts. The 12.71 percentage point gap on yields of Argentine bonds over U.S. Treasuries, while the widest among major emerging markets, is down from a four-year high of 13.4 percentage points on Nov. 28.

“Win, lose or draw, if Argentina is pushed, they’ll redo the payment system without a doubt” and shift investors from debt issued under New York law, Ray Zucaro, who helps oversee $300 million of emerging-market debt at SW Asset Management, said by phone from Newport Beach, California. “If push comes to shove and they rule, that’s what they’ll do.”

Argentina’s Prospects

Norma Madeo, a spokeswoman for the Economy Ministry, didn’t reply to an e-mail message seeking comment on the government’s plans to pay bondholders.

The latest offer to holdout creditors from the nation’s record $95 billion default in 2001 means the government will probably lose its bid to overturn a lower-court ruling that requires the nation to repay in full, according to Anna Gelpern, a law professor at American University in Washington. Jonathan Blackman, a lawyer for Argentina, told the appeals court in February that the nation wouldn’t obey the order to make a full payment to the holdouts, which include billionaire Paul Singer’s hedge fund Elliott Management Corp.

That confrontation sets up a potential default on the restructured notes because the lower court also blocked the government from servicing those securities without making a $1.3 billion payment.

‘Whatever Context’

In an interview on local television, Boudou told reporters, “Argentina will meet its commitments in whatever context. We’re not going to accept a blockage of Argentina’s willingness and ability to pay.”

Alfredo Scoccimarro, a presidential spokesman, didn’t return telephone calls seeking comment on Boudou’s statement.

The appeals court asked the holdouts yesterday to file a response to Argentina’s proposed payment plan by April 22.

Boudou’s comments mean the government is willing to be in contempt of court to make about $1.7 billion in payments this year to investors who accepted losses of about 70 percent in the restructurings, according to Sebastian Vargas, an economist at Barclays Plc.

If the court rules in favor of the holdouts and prevents intermediaries such as Bank of New York Mellon Corp. from transferring money to restructured bondholders, Argentina may change the notes’ jurisdiction to Argentine or even Italian law, according to Alberto Bernal, the head of fixed-income research at Miami-based brokerage Bulltick Capital Markets.

Changing Jurisdiction

Argentina can change the legislation over a single series of the bonds if holders of 75 percent of the securities consent, according to the securities’ prospectuses. Changing the jurisdiction of two or more series would require approval by owners of at least 85 percent of all affected bonds and by holders of at least two-thirds of each individual series.

“We are hearing that Buenos Aires has advanced materially in an eventual ‘Plan B,’” Bernal wrote in a note to clients April 1. The plan may also include reopening the exchange for holdouts who aren’t already suing Argentina and a buyback offer for New York-law bonds, according to Bernal.

Traders shouldn’t underestimate how difficult it would be for President Cristina Fernandez de Kirchner to prevail under such a plan if the appeals court upholds U.S. District Judge Thomas Griesa’s ruling, according to Bank of America Corp.

The only way Argentina can continue to pay if the ruling is upheld is “with a totally new, non-U.S. payment chain, which would take a long time to construct,” Jane Brauer and Flavio de Andrade, strategists at Bank of America in New York, wrote in a March 27 report.

Third Parties

An exchange into local-law bonds would require bondholders to agree to move their notes to an Argentine custodian that is a member of Euroclear Bank SA, the world’s biggest settlement system, to cancel the current bonds, the analysts said in the report. A cancellation would have to be routed through BNY Mellon, and intermediaries including Euroclear and the Depository Trust Co. would probably alert the court for clarification, according to the report.

“There may be bondholders that are in support of Argentina’s making a payment, but may not be as comfortable changing the instruments to Argentine law with all payments made in Argentina through the Argentine payment system,” Bruce Wolfson, a lawyer at Bingham McCutchen LLP in New York, who has more than 30 years of experience in emerging-market debt restructurings, said in a telephone interview. “It’s in my experience unprecedented.”

Debt Indexes

Bonds issued under Buenos Aires law wouldn’t qualify for benchmark international debt indexes, which would prevent some funds from owning them, according to Bank of America.

Most emerging-market debt sold overseas is governed by New York law, according to the International Monetary Fund. Before seeking to circumvent the ruling, Argentina can try to appeal to a larger number of judges or the U.S. Supreme Court.

The cost to protect $10 million of Argentine debt against non-payment during five years with credit-default swaps plunged 543 basis points, or 5.43 percentage points, to 2,728 basis points at 2:00 p.m. in New York, data compiled by CMA Ltd. show. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

While firms from JPMorgan to Credit Suisse Group AG said the bonds would sink following Argentina’s payment proposal, restructured notes have fallen just 0.1 percent since March 29, according to index data compiled by JPMorgan. That’s a sign investors are optimistic that Argentina will do whatever it takes to remain current on the notes, according to Mario Rappoport, a managing director at Gleacher & Co. in New York.

“All the investors who had their position in Argentina already went through enough hell,” Rappoport said in a telephone interview. “It just doesn’t feel like the market is ready to collapse.”

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