Argentina Default Shutting Buenos Aires Bond-Sale Window

Argentina’s second default in 13 years is threatening to upend local governments’ plans to sell bonds abroad.

Borrowing costs for the province and city of Buenos Aires, which both sought to issue foreign-currency debt this year, have surged since a legal dispute prevented the nation from making a bond payment by July 30. Since then, yields on the province’s debt due 2015 have jumped almost 7 percentage points to 19.7 percent, while those on the city’s similar-maturity notes climbed 6 percentage points to 16.7 percent.

The bond-sale plans are being jeopardized by Argentina’s inability to reach a settlement with creditors led by billionaire Paul Singer’s Elliott Management Corp. over unpaid debts from the nation’s 2001 crisis. Prior to the country’s default last month, the province and city met with investors to gauge demand for offerings yielding below 12 percent and 10 percent, respectively, according to Ray Zucaro, a money manager at SW Asset Management LLC, who participated in the talks.

“They didn’t take advantage of a window where they had one,” Zucaro, who helps oversee $420 million of assets, including Buenos Aires province bonds, said in a telephone interview from Miami. “Perhaps they thought rates would come down if the country’s legal problems had been solved.”

Sale Plans

Buenos Aires province planned to raise about $1 billion abroad and had sent invitations to investment banks to present proposals, people with direct knowledge of the matter said in May. Claudio Berlier, a spokesman for the province’s economy ministry, declined to comment on its bond sale plans and whether it had shelved its offering for now.

The city of Buenos Aires hired JPMorgan Chase & Co., HSBC Holdings Plc and Bank of America Corp. to manage its sale, two people with direct knowledge of the plans said in July.

The capital, which is authorized to do an exchange or tender offer for as much as $890 million, is still waiting for an opportune time to tap the bond market, Abel Fernandez, the city’s head of public credit, said in an e-mail.

“We continue to wait for the opportunity to perform the transaction when market conditions permit one that’s favorable,” Fernandez said. Mayor Mauricio Macri said in March that the city was looking to sell its first global bond since 2012 this year.

Refusing Terms

Argentina was blocked from making a $539 million interest payment by a U.S. judge until it reaches a settlement with the holdout creditors from its 2001 default or pays them in full.

Elliott and other hedge funds had refused to accept new bonds worth about 30 cents on the dollar in restructurings in 2005 and 2010 and instead sued for repayment and won.

The nation was unable to resolve the dispute by a July 30 deadline, triggering the latest default. Government officials have said the nation can’t improve terms for Elliott before the end of the year because of a contractual provision that may trigger as much as $120 billion in additional claims.

The province may wait until the first or second quarter of 2015 to issue because its debt matures in October, according to Alejo Costa, a Buenos Aires-based strategist at Puente Hermanos Sociedad de Bolsa SA.

If the local governments are unable to borrow dollars to refinance, they can try financing themselves locally, said Costa. They can also use local-currency tax revenue and exchange it for dollars at the central bank, he said.

Spending Cuts

The bank is struggling to conserve foreign-currency reserves, which have fallen 22 percent in the past year to about $29 billion, close to an eight-year low.

“The concern is, will the central bank give them access to hard currency or will they have to borrow from some other agency?” SW’s Zucaro said. “That’s a big concern for the market and why their bonds are trading so heavy.”

Buenos Aires province has $1.05 billion in bonds maturing next year. The city has a total $890 million due in 2015 and 2017, data compiled by Bloomberg show.

Argentina’s government bonds have slumped for four of the past five trading days on concern private efforts to resolve the dispute with hedge-fund creditors have come to a halt. Elliott’s NML Capital Ltd. said Aug. 15 that talks with private parties have failed to produce an acceptable solution.

The extra yield investors demand to hold Argentine government debt over U.S. Treasuries narrowed 0.17 percentage point to 7.66 percentage points at 3 p.m. in Buenos Aires, according to JPMorgan Chase & Co.’s EMBIG index.

International banks that had discussed finding a buyer for at least a portion of the defaulted securities couldn’t agree on a price, a person briefed on the meetings said last week.

Provinces including Buenos Aires that were also planning on turning to overseas markets for funding will have to cut spending, according to Veronica Sosa, an analyst at Buenos Aires-based research company Economia & Regiones. Provinces have avoided funding public works and are trimming salaries by adjusting them below inflation, she said.

“It’s a pretty adverse effect for the provinces,” Sosa said by phone. If the government remains in default, “the situation is pretty complicated.”

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