Argentina Trumpeting Demand for Swap That May Not Exist

Argentina’s Cabinet Chief Jorge Capitanich said today that “many” bondholders have publicly expressed their willingness to receive payments outside of the U.S. as a means to circumvent a legal dispute that’s disrupted debt servicing.

Only one investor, though, could be found in a search for people who’ve made public statements backing the debt exchange proposal: Fintech Advisory Inc.’s David Martinez. Most investors aren’t willing to contradict U.S. courts, which say the plan to pay debt in Buenos Aires or France is illegal, according to Stuart Culverhouse, the chief economist at investment bank Exotix in London. Investors are also concerned they won’t be able to transfer the funds outside the South American country without U.S. intermediaries, which are legally banned from assisting Argentina, he said.

“The big problem is the legal risk,” Culverhouse said in a telephone interview. “Nobody wants to be seen as being in contempt of court so I don’t see how they’ll get sufficient participation for this to be a success.”

President Cristina Fernandez de Kirchner said in an Aug. 19 speech that she plans to make bond payments via local banks, instead of trustee Bank of New York Mellon Corp., and wants to offer investors the option to voluntarily exchange international bonds into new debt issued under domestic law. Lawmakers added France as an additional payment location in the bill that was approved by the senate yesterday. The measure now awaits a vote in the lower house.

‘Many Bondholders’

“Regarding the opinion of many bondholders, they’ve publicly expressed their willingness to participate in the payment system being proposed by Argentina in the sovereign payment law,” Capitanich said today in Buenos Aires. “There’s obviously a lot of interest from many creditors, holders of bonds, to participate in the sovereign payment law to receive what is legitimately theirs.”

Veronica Lara, a spokeswoman for Capitanich, didn’t immediately respond to an e-mail and telephone message seeking comment on which creditors are supporting the plan.

The proposed swap is an attempt by Fernandez to circumvent a U.S. judge’s order that’s blocking payments on restructured bonds until the nation pays holders of debt Argentina defaulted on in 2001 who sued for full repayment and won.

‘Right Way’

Martinez said in an Aug. 24 interview with Pagina/12 newspaper he backs Argentina’s plan as it’s “the right way to regain the ability to conduct its business, to reconstruct the payment on its restructured bonds.”

Martinez is waiting for approval from Argentine regulators to complete a $960 million purchase of Telecom Italia SpA’s stake in Telecom Argentina SA.

The government also intends to pay holders of defaulted bonds using the same terms as the rest of its restructured debt, regardless of whether they decide to accept the swap.

For Paul McNamara, a money manager overseeing $6.5 billion in emerging-market debt, including Argentine bonds, at GAM U.K. Ltd. in London, the problem with the plan is it’s unclear whether it can technically be done.

‘Key Issue’

“The key issue is the feasibility of the plan,” McNamara said in a telephone interview from London. “Until we see a specific legal proposal we have no way of assessing if this can be done.”

Jim Craige, who helps oversee $65 billion of assets at Stone Harbor Investment Partners LP including Argentine debt, said Aug. 20 that a swap into local law bonds may be attractive to holders of the nation’s shortest maturity bonds, such as the 2017 notes. He didn’t say at the time whether he intended to take part in the swap and wasn’t immediately available for comment today.

Still, Argentine bonds are trading higher than their five-year average on bets the government will resolve the legal dispute when a clause in the bonds that prohibits making a better offer to holdouts without sweetening the deal to the rest of bondholders expires Dec. 31.

Argentine bonds due 2033 are up 3.38 cents this week to 82.88 cents on the dollar, compared with a five-year average of 74.18 cents.

“There’s no point in swapping to local debt,” Roberto Sanchez-Dahl, who helps oversee $3.5 billion of emerging market securities at Manulife Asset Management, including Argentine bonds, said by phone from Boston. “The expectation is Argentina will fix the default after January.”

Before it's here, it's on the Bloomberg Terminal.