ISDA Asked If Event Clause Triggered on Argentina Debt Swaps

The International Swaps & Derivatives Association said it was asked to rule whether a clause in credit-default swaps on Argentina has been triggered after the government said it won’t make bond interest payments.

Schulte Roth & Zabel LLP, a U.S. law firm, requested the ruling for a “potential repudiation/moratorium event,” according to a letter dated June 20 on ISDA’s website. The firm, which said it’s counsel for a holder of a contract that was set to expire that day, said that even if Argentina makes the payment, the stated intention not to pay would constitute the event under ISDA’s 2003 credit derivatives definitions.

Argentina is negotiating with creditors, who refused to accept restructured debt after its default in 2001, following a U.S. Supreme Court ruling last week requiring full payment. The ruling blocks interest payments on restructured bonds until holdout creditors are paid. President Cristina Fernandez de Kirchner’s government said it’s unable to pay all claims.

“A potential repudiation/moratorium concerns only the declaration of a default in the future,” Craig Stein and Kristin Boggiano, of Schulte Roth & Zabel, wrote in the letter on behalf of the client. “It is not relevant if the default is ever actually realized.”

Payment Due

Unlike bankruptcy and other credit events that can trigger payouts on credit-default swaps, 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.

Should ISDA’s determinations committee rule that the first part has occurred, the scheduled termination date of the contract would be extended “to allow for a subsequent failure to pay or restructuring credit event,” according to the letter.

The government owes $900 million in interest on June 30 for bonds issued as part of restructurings in 2005 and 2010. The New York judge’s order requires Argentina to pay creditors, including billionaire Paul Singer’s Elliott Management Corp., $1.5 billion on defaulted debt before it’s allowed to make the interest payments.

Fernandez says the nation could owe as much as $15 billion if forced to pay all holders of defaulted bonds on the same terms, which would deplete more than half of its foreign reserves.

Equal Terms

Argentina’s attorneys will ask the U.S. district judge for fair and equal negotiation terms with holdout creditors that respect the rights of bondholders who participated in the earlier exchanges, Cabinet Chief Jorge Capitanich said today in Buenos Aires.

“Argentina is in a weak a position and the plaintiff is in a strong position, but the game dynamic is that neither wants to force it into default,” Stuart Culverhouse, global head of research at Exotix Partners LLP in London, said in a telephone interview. “Whether they can reach a deal within the time frame is going to be tough.”

Argentine government dollar bonds due 2033 surged 9.58 cents on the dollar to 87.37 cents, the highest since April 2011, at 11:26 a.m. in New York. The extra yield investors demand to own Argentine bonds over U.S. Treasuries narrowed 0.42 percentage points to 6.66 percentage points.

Debt Default

The government defaulted on a record $95 billion debt in 2001, replacing the defaulted bonds with new ones at a discount in two restructurings. Holdouts have fought for full payment on the defaulted bonds. Argentina had vowed never to pay the holdouts, calling them “vultures” and refusing to pay U.S. court judgments in their favor.

Argentina’s debt is the world’s most expensive to insure, according to data compiled by Bloomberg. It cost $3.4 million upfront and $500,000 annually to protect $10 million of Argentina’s debt for five years, signaling a 64 percent chance of default within that time, according to CMA.

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.

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