Serial Defaulter Burnishes Taper-Proof Status: Argentina Credit

Argentina is enriching debt investors with returns that are nine times the average in emerging markets this quarter, underscoring the nation’s status as a haven against Federal Reserve policies that have whipsawed developing-nation bondholders.

The government’s dollar-denominated notes have returned 16.3 percent since the end of June, second only to Egypt among 58 emerging markets tracked by JPMorgan Chase & Co. The third-quarter advance has reversed losses on the country’s bonds this year, with the securities returning 1.9 percent, compared with a drop of 6.1 percent for sovereign debt from developing nations.

Argentine bonds have split from the rest of the developing world as investors focus on whether South America’s second-largest economy will be able to stave off its seventh default since independence in 1816. A delay in the enforcement of a U.S. appeals court decision in August ordering Argentina to pay holders of defaulted debt in full has spurred gains, even as speculation the Fed may begin tapering bond-buying plan as soon as next month roils markets from Brazil to India.

“Argentina trades on its fundamentals, the perception of legal risk from New York courts, its growth, its politics,” Alejandro Urbina, who helps oversee $800 million at Silva Capital Management LLC, said by telephone from Chicago. “Some people may be looking at Argentina opportunistically, seeing legal matters on the sidelines right now.”

Downgrade Proof

The bonds rallied even after Standard & Poor’s lowered the nation’s credit rating one level to CCC+, or five levels from default, citing increased risks to debt payments from the legal proceedings.

While a U.S. appeals court on Aug. 23 upheld a district court order that Argentina must pay holders of its defaulted debt in full when it makes payments on performing bonds, the enforcement of the decision was postponed until the Supreme Court decides whether to review the case. That may not come until the first quarter of 2014, according to Richard Samp, chief counsel of the Washington Legal Foundation.

Vladimir Werning, an economist at JPMorgan, yesterday raised his recommendation on Argentine bonds to overweight from market weight, citing improving demand for risky assets and prospects of a lengthier legal battle for Argentina.

President Cristina Fernandez de Kirchner insists that she can only offer holdouts from Argentina’s $95 billion default in 2001 the same terms as creditors who accepted losses of about 70 percent in debt restructurings in 2005 and 2010.

The nation has said it would never voluntarily obey an order to pay holdouts in full, fueling speculation it would opt to default when the orders are enforced.

‘Serial Payers’

On Aug. 26, Fernandez said Argentina would be willing to swap securities governed under New York law to local legislation to allow restructured bondholders to continue receiving debt payments regardless of the legal outcome.

“Instead of recalcitrant debtors, we are serial payers,” Fernandez said last month. On Sept. 22, Fernandez said in a televised interview that U.S. courts should let Argentina continue honoring its obligations with current bondholders.

If the Supreme Court denies Argentina’s request, the stay would be lifted, Samp said Sept. 16 at a seminar hosted by the Emerging Markets Trade Association in New York. If the high court decides to hear the appeal, the stay will remain in place and the case will be scheduled for argument in October or November of 2014, pushing out a decision until probably the first half of 2015, he said.

Lifting Stay

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries narrowed 12 basis points, or 0.12 percentage point, to 1,001 basis points at 1:34 p.m. in New York, JPMorgan index data show.

Argentina’s five-year credit-default swaps, contracts that protect the nation’s bondholders against non-payment, tumbled 202 basis points to 2,065 basis points at 1 p.m. in New York, according to data compiled by CMA Ltd.

Holdout creditors including NML Capital Ltd., a unit of billionaire hedge fund manager Paul Singer’s Elliott Management Corp., may still ask the Second Circuit Court of Appeals to lift the stay on the order for Argentina to pay holders of defaulted debt in full after Fernandez unveiled a plan to service the debt under a different jurisdiction.

‘Compelling Reasons’

“You need good grounds to lift that stay,” Robert Cohen, an attorney at Dechert LLP who represents NML, said Sept. 16 at the seminar. “The second circuit considered the comments that Argentina’s counsel made at argument that Argentina wouldn’t obey. Nevertheless, they imposed the stay, so if we move to lift it we would have to have compelling reasons, and we may.”

The South American nation’s debt yields an average 12.82 percent, more than any emerging market globally, JPMorgan data show.

“When you get into this legal running out the clock, kicking the can down the road process, the earliest we will likely see any news from the Supreme Court is March,” Michael Roche, an emerging-market strategist at Seaport Group LLC, said in a telephone interview from New York. “That gives you a number of coupon payments to be put under your belt.”

Before it's here, it's on the Bloomberg Terminal.