Bond Traders Aren't Ready to Reinvest in Argentina After Payout

  • Argentina sold less than half of the bonds it auctioned
  • Reserves plunged the most in nine years after bond payment

With Argentina’s presidential elections two weeks away and creditors still on the nation’s heels, bondholders who just saw their investment in the country mature are in no hurry to plow money back into it. 

The government has struggled to lure buyers in the wake of Argentina’s $5.9 billion payment to bondholders Oct. 5. At a local auction a day later, it sold just $699 million of the $1.5 billion of dollar-denominated notes it offered. Its foreign bonds rallied 1.2 percent last week, trailing the gain in emerging-market debt.

The lackluster demand for Argentina bonds marks a reversal from earlier in the year, when investors piled into the debt betting that a new government will end the nation’s decade-long legal battle with creditors led by billionaire Paul Singer’s Elliott Management. Now, with the foreign reserves close to a nine-year low and its budget deficit forecast to swell to the highest since at least the 2001 financial crisis, investors are taking a wait-and-see approach.

“They have no reserves and they’re running a huge cash-flow deficit -- that’s the main concern,” said Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group LLC. “Regime change alone is not a solution. Argentina needs a policy change.”

She said that some investors were probably reluctant to buy the bonds that Argentina sold on Oct. 6 because they feared getting caught up in the nation’s debt dispute. 

That same day, a group of creditors led by Elliott and Aurelius Capital Management served international investors with subpoenas to seek information on the sale. They’re trying to curtail Argentina’s ability to raise money abroad in an effort to pressure the country to comply with a U.S. court order to pay defaulted debt. They’ve said marketing to such investors qualifies the sale as international, putting it within the scope of a court order that blocks Argentina’s ability to make payments on overseas bonds until the creditors are repaid.

That ruling helped trigger Argentina’s second default in 13 years in July 2014, when President Cristina Fernandez de Kirchner refused to comply. The country, whose deficit Morgan Stanley expects will swell to about 6 percent of its gross domestic product this year, hasn’t tapped international debt markets since its 2001 default on $95 billion.

The Economy Ministry’s press office didn’t return calls and e-mails seeking comment on the lack of reinvestment and the result of the bond sales.

Two days after its Oct. 6 offering, Argentina was only able to sell $385 million of the $1 billion in dollar-linked notes due in 2017 it had planned to sell.

“Successfully reducing the fiscal deficit seems critical to boost investors’ confidence,” Morgan Stanley analysts said in a report Oct. 9.

Investors will look to put their money back in Argentina after the nation’s Oct. 25 election, according to Alberto Bernal, the head of fixed-income research at Bulltick LLC. 

Ruling party candidate Daniel Scioli is the frontrunner in the latest polls.

At 9.55 percent, Argentina’s dollar notes due in 2024 yield 3.5 percentage points more than the average for emerging markets.

“The money that was repaid will eventually make it back to Argentina, because there’s just not that many options out there at those rates,” Bernal said from Miami. “If you were going to sell over macro imbalances, you should have done that two years ago, not now that things are soon to change. Argentina isn’t for the faint of heart.”

Still, Argentina’s dwindling reserves will continue to put off bond investors, according to Jefferies’s Morden. The cash hoard tumbled by the most in nine years after the country made its latest bond payment.

“Everyone’s looking at reserves -- they’re counting pennies,” she said. “The liquidity squeeze is now the main concern for everyone, foreigners and locals, across all markets, across all holders.”

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