Argentina Local-Law Dollar Bonds Tumble After Debt Swap Plan

Argentina’s dollar bonds sold under local legislation fell the most in four months after President Cristina Fernandez de Kirchner said the nation will offer to swap holders of defaulted and restructured debt into the notes.

Prices on local law bonds due 2017 dropped 2.85 cents to 85.29 cents on the dollar at 9:28 a.m. in New York, their biggest drop on a closing basis since April 12, according to data compiled by Bloomberg. The yield climbed 1.12 percentage points to 13.13 percent.

Fernandez said yesterday that holders of bonds issued in debt restructurings will be able to swap them into notes covered by Argentine law in a bid to prevent payment disruptions from a U.S. court ruling in favor of holdout creditors from the 2001 default. On Aug. 23, a three-judge panel said Argentina can’t pay holders of the restructured international bonds unless it pays the defaulted bondholders in full.

“The possibility of increased supply will keep pressure on prices” of the local securities, Russ Dallen, the head bond trader at Caracas Capital Markets in Miami, said in an e-mail.

Argentina’s offer, which is pending lawmakers’ approval, would give the holders of restructured bonds that come due in 2017, 2033 and 2038 the chance to change into local-law securities with the same terms and currency.

Switching into the local securities may post risks for bondholders because Argentina could unilaterally change rules to put investors at a disadvantage, according to Lutz Roehmeyer, a money manager at Landesbank Berlin Investment.

‘Fool Investors’

“Risks increase for bondholders because the bonds have a very long maturity,” Roehmeyer said in an e-mail. “Argentina shows willingness to pay today, but if there is a problem with ability to pay then Argentina will fool investors again in the future because Argentina can change its local law at its own will.”

Argentina’s dollar bonds due in 2033 and covered by New York law sank 1.84 cent to 59.33 cents on the dollar, boosting yields by 0.46 percentage point to 15.2 percent.

The extra yield investors demand to own Argentine bonds over U.S. Treasuries jumped 23 basis points, or 0.23 percentage point, to 1,098 basis points, according to JPMorgan Chase & Co.’s EMBI Global index.

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