Singer Hedge Fund’s Argentine Default Payoff Seen Delayed

Bondholders are signaling that Argentina’s decade-long legal dispute with billionaire Paul Singer over its defaulted debt won’t be resolved any time soon.

Government notes due 2033 have returned 6 percent since May 27, when the U.S. Supreme Court said it would hold a hearing today to consider taking the nation’s appeal of a ruling forcing it to repay creditors led by Singer’s Elliott Management Corp. when it services restructured debt. That’s more than triple the average 1.2 percent gain in emerging markets.

The advance shows investors are confident the high court will take the case or seek counsel from the Solicitor General, delaying a final ruling and ensuring Argentina continues to pay bondholders, AllianceBernstein LP said. If the court rejects the petition, Argentina may opt to default on $907 million of interest payments due June 30 instead of paying creditors that government officials have called “vultures.” The court may announce its decision as soon as June 16, when it’s scheduled to release orders including a list of new cases it will hear.

“The market is placing only a very small probability that the Supreme Court will reject the case and a much higher probability that it will ask the Solicitor General for an opinion,” Marco Santamaria, who helps manage $25 billion of emerging-market debt at AllianceBernstein LP, said by phone from New York. AllianceBernstein is part of the so-called “Exchange Bondholder Group” that joined Argentina in challenging the court order.

Debt Swaps

A rejection of Argentina’s appeal would leave intact a 2012 ruling requiring the country pay holders of debt left over from its $95 billion default in 2001 in full. Holders of more than 90 percent of the defaulted bonds agreed to provide debt relief in restructurings in 2005 and 2010, at losses of about 70 percent.

It would make sense for the Supreme Court to seek government opinion on the case since the U.S. has expressed concern about the effects of the ruling on the global financial system, Economy Minister Axel Kicillof said today.

If the court denies the appeal, the ability to seek a resolution with holdouts may depend on the lower courts, Kicillof said.

‘Several Scenarios’

“It would open up several scenarios but they don’t only depend on what the government decides because we’ll have to see what the lower courts decide - if this goes back to the lower courts, if it returns to Judge Griesa and Judge Griesa - I was reading this in the newspaper the other day - decides whether we can negotiate or not,” Kicillof said today in a radio interview on Vorterix.

In a report yesterday, Daniel Chodos and Casey Reckman, analysts at Credit Suisse Group AG, assigned a 55 percent to 60 percent chance that court proceedings will extend into 2015.

“The Supreme Court will call for the U.S. Solicitor General’s views following its 12 June conference,” they said. “This would likely delay the resolution of this case until the second quarter of 2015, which would be positive for Argentine assets.”

Credit Suisse recommended buying local law discount bonds due in 2033 that offer more protection if the court denies the appeal. The extra yield investors demand to hold Argentine debt over U.S. Treasuries widened 0.09 percentage point to 7.63 percentage points at 4:34 p.m. in Buenos Aires.

Jane Brauer, a strategist at Bank of America Corp., said investors run the risk of suffering steep losses should the high court reject the appeal.

Downside Risk

“The downside is bigger than the upside but the probability is smaller,” she said in a telephone interview from New York.

The cost of protecting Argentine bonds against default has soared since the newspaper Clarin reported May 28 that Argentina’s lawyer recommended in a memo that the nation default if its appeal is denied. A lawyer for Elliott told a judge May 30 the leaked memo may be “the smoking gun” showing Argentina plans to defy U.S. courts and default.

“There is no smoking gun and there is no plan,” Carmine Boccuzzi, a lawyer for Argentina, told U.S. District Judge Thomas Griesa at a May 30 hearing in New York.

While President Cristina Fernandez de Kirchner has vowed never to pay holdouts, Argentina’s decision to adopt a less defiant tone with the court has fueled optimism it may get a more favorable ruling, according to Sebastian Vargas, an economist at Barclays Plc.

Argentina said in a May 27 filing to the Supreme Court that it would comply with any ruling.

“There has been a reassessment of the probabilities of having a favorable outcome in the courts,” Vargas said in a telephone interview from New York.

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