Argentine Bonds Rally as Negotiation Sought With Holdouts

Argentine bonds rallied, sending yields to a three-year low, as government lawyers lobbied a New York court for more time to reach a settlement with holders of defaulted bonds and stave off a new debt crisis.

Argentina filed a request to U.S. District Judge Thomas Griesa today to delay the effects of a ruling that forces the nation to pay $1.5 billion to holdout creditors when making a payment on its restructured debt due June 30, according to court records. The government is seeking a negotiated solution to the decade-long conflict to avoid what it says could be as much as $15 billion in additional claims that would cause a default.

Optimism that an accord will be reached sent yields on government dollar bonds due 2033 to the lowest since April 2011. The extra yield investors demand to own Argentine bonds over U.S. Treasuries narrowed 0.35 percentage points to 6.74 percentage points, putting the country’s so-called spread below Venezuela, Ukraine and Belize among developing nations tracked by JPMorgan Chase & Co.’s EMBIG indexes.

“The market is already pricing in a negotiation scenario,” Alejo Costa, a strategist at Buenos Aires-based brokerage Puente Hnos. Sociedad de Bolsa SA, said in an e-mail.

President Cristina Fernandez de Kirchner said June 20 that her government will seek a negotiated solution to the conflict over defaulted bonds. The legal battle with creditors led by billionaire hedge fund manager Paul Singer’s NML Capital Ltd. came to a head last week when the U.S. Supreme Court declined to hear Argentina’s appeal of a court ruling ordering it to pay holdouts at the same time it services its restructured debt.

‘Fair and Equal’

“What we’re asking for is a suspension of the ruling so that we can negotiate in fair, equal and legal conditions,” Economy Minister Axel Kicillof said today at a press conference in Buenos Aires. “That’s to say without failing to meet our obligations to holders of restructured debt.”

As Fernandez works to negotiate with bondholders, she’s also confronted with an economic slump along with quickening inflation at home. Argentina’s economy contracted for the first time in almost two years as the government implemented policies to stem a drain on the country’s foreign reserves.

Gross domestic product contracted 0.2 percent in the first quarter, trailing the median estimate for growth of 0.5 percent among seven economists surveyed by Bloomberg.

Daniel Pollack, an attorney with McCarter & English LLP in New York, was picked to assist in negotiations between Argentina and holdouts, according to court filings.

Stock Gains

A clause in the restructured bonds, which guarantees exchange bondholders that the government won’t make a better offer to investors who didn’t participate in 2005 and 2010 restructurings before Dec. 31, 2014, will be respected, Capitanich said today.

The country’s Merval benchmark stock index rose 8.7 percent, the most since November 2008, while state-run energy company YPF SA’s American depositary receipts rallied 5.5 percent to $35.61 as of 3:25 p.m. in New York.

Bonds due in 2033 rallied 9.37 cents on the dollar to 87.16 cents, pushing yields down to 9.97 percent.

The peso strengthened 6 percent in the black market to 11.70 per dollar while the so-called blue-chip swap, an implied exchange rate taken from the swapping of peso and dollar assets, slid 5.3 percent to 10.0323.

Argentina published full page advertisements last weekend in the Wall Street Journal and the New York Times echoing the government’s arguments that it wants to keep paying its restructured debt yet is being impeded by the court rulings.

CDS Request

Last week, Fernandez and Kicillof had called the court ruling “extortion” and said they would begin steps to change foreign law bonds to local legislation to skirt the ruling. The Economy Ministry also published a statement on June 18 saying the court ruling meant the nation wouldn’t be able to make a $900 million interest payment on the restructured debt due June 30.

The International Swaps & Derivatives Association said it was asked by Schulte Roth & Zabel LLP, a U.S. law firm, to rule on whether credit-default swaps on Argentina’s debt have been triggered after the government said it won’t make the payment.

A repudiation/moratorium event is a two-part process, according to ISDA’s rules. The first is an evaluation of the potential for default, while the second involves a failure to pay.

Argentina’s debt is the world’s most expensive to insure, according to data compiled by Bloomberg. It cost $3.7 million upfront and $500,000 annually to protect $10 million of Argentina’s debt for five years, signaling a 67 percent chance of default within that time, according to CMA.

Bond Swaps

There were 2,602 credit-default swaps contracts covering a net $906 million of Argentina’s debt outstanding as of June 13, according to the Depository Trust & Clearing Corp.

The government’s default was a record in 2001. It swapped the defaulted bonds for new ones worth about 30 cents on the dollar. Holdouts have fought for full payment on the defaulted bonds. Argentina had vowed never to pay the holdouts more than it gave to exchange bondholders, calling them “vultures” and refusing to pay U.S. court judgments in their favor.

Kicillof said last week the U.S. court was pushing the government into default since they would have to either pay holdouts and face similar claims for as much as $15 billion, equal to more than half of international reserves, or risk having payments to exchange debt blocked by the ruling.

In Fernandez’s speech on June 20 she didn’t call holdouts vultures or say the ruling was extortion, as she had on June 16 when the U.S. Supreme Court declined to review the case.

“The evolution of her rhetoric over the past week strongly suggests that President Kirchner wants to avoid a selective default, let alone a solvency crisis, under her watch,” Credit Suisse Group AG economist Casey Reckman wrote in a report published today.

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