Argentina Default Swaps Auction Postponed, ISDA Says

The International Swaps & Derivatives Association said an auction to settle more than $800 million of swaps bets on Argentina’s default is delayed amid a challenge to the bonds that may increase the payout for those wagering on the default.

A panel of credit-default swaps dealers and investors governing the market pushed out the auction date to at least Sept. 2 from tomorrow, according to a statement on ISDA’s website. They received a challenge to two yen-denominated bonds that were on a list to be included in the process.

The group ruled earlier this month that a failure-to-pay credit event had occurred that would trigger settlement of the swaps. An interest payment made by Argentina to the bond trustee was not passed on to noteholders before a July 30 deadline. That followed a court ruling barring the transfer of money until a dispute with hedge funds led by Elliott Management Corp. is resolved.

Inclusion of the bonds in the list may bring down the recovery prices for the debt obligations, which in turn increases payout for creditors who bought protection, according to Konstantin Hammerschmidt, a money manager at XAIA Investment GmbH, which manages about 3 billion euros ($3.98 billion) in credit funds.

Yen Bonds

“If you have a long CDS position, then you want a high payout,” he said in a telephone interview. “So you want to reduce the recovery rate, and these bonds are the cheapest to deliver.” Long positions are those in which investors bought swaps.

The bonds in question are yen-denominated notes coming due in 2033 and 2038 with more than $250 million outstanding, according to data compiled by Bloomberg. These notes were included in the list of so-called “deliverable obligations” after the ISDA committee received the documentation by its Aug. 15 deadline.

The challenge centers on whether the bonds can be considered for the auction. For the securities to be allowed, they must either be issued on or after June 2, 2005, or can be identified as a “new security” as defined in a prospectus supplement from January 2005, according to a December 2005 document on the ISDA website.

The auction process sets a value for the defaulted bonds, which is then used to determine payouts for swaps holders.

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