Argentine Bonds Tumble After Default as Banks Seek Holdout Deal

By Katia Porzecanski and Pablo Gonzalez  

July 31 (Bloomberg) -- Bill Blain, a strategist at Mint Partners Ltd., discusses the U.S. economy, European Union trade sanctions against Russia, the outlook for Argentinian bondholders after Standard & Poor's declared the country in default yesterday and Banco Espirito Santo SA's first-half net loss of 3.6 billion euros ($4.8 billion). He speaks with Jonathan Ferro on Bloomberg Television's "On the Move." (Source: Bloomberg)

Argentina’s dollar bonds sank after the country missed a payment on $13 billion of its debt as JPMorgan Chase & Co. (JPM) and other banks sought a deal that would allow the country to resume servicing its securities.

A group of international investment banks met with Elliott Management Corp. and other so-called holdout creditors to buy the securities they hold from the country’s 2001 default, according to a bank official familiar with the matter, who asked not to be identified because the information is private. The official said talks would continue. Buenos Aires-based newspaper Ambito reported that a deal on the amount was reached, while other issues had yet to be resolved.
The nation missed a deadline yesterday to pay $539 million in interest after two days of negotiations in New York failed to produce a settlement with Elliott and other hedge funds that won a court order for full repayment on the securities they own. The ruling prevents Argentina from servicing its debt until the holdouts settle or are paid the $1.5 billion judgment.

Related:

• Argentina’s Default Clock Runs Out as Debt Talks Collapse
• Argentina Declared in Default by S&P as Talks Fail
• Opinion: The Paradox of the Argentine Debt Drama

“If two parties spend close to two full days in a room negotiating, you’d expect there to be some progress,” Alejo Czerwonko, a strategist at UBS Wealth Management in New York, said by e-mail. “Many investors are losing faith an agreement can ever be reached. All eyes are focused on a private solution now.”

Photographer: Diego Levy/Bloomberg

Pedestrians walking in the financial district are reflected in a window displaying... Read More

Cabinet Chief Jorge Capitanich said in the capital that the government isn’t involved in talks with private parties. JPMorgan declined to comment on the speculation about a deal, as did Danielle Romero-Apsilos, a Citigroup spokeswoman.
Aurelius Capital Management LP, which won the lawsuit along with Elliott, said in a statement that while it has been approached by private parties, no acceptable offer was made. Elliott’s NML unit, which has been battling Argentina for years in an effort to win payment on its bonds, declined to comment.

CDS Ruling

The International Swaps & Derivatives Association said it will rule on whether yesterday’s missed bond payment means credit-default swaps have been triggered on Argentina’s $29 billion in overseas securities. A committee of 15 dealers and investors will meet at 11 a.m. in New York tomorrow. A ruling that a failure-to-pay credit event has taken place will trigger an auction which will ascertain sellers’ liabilities.
Argentine notes due in 2033 tumbled 6.47 cents to 89.1 cents on the dollar as of 1:28 p.m. in New York. The bonds had rallied 11.7 cents the previous two days. The Merval stock index fell from a record, plunging 6.3 percent.

Photographer: Diego Levy/Bloomberg

Pedestrians walk in the financial district of Buenos Aires on July 30, 2014.

Ambito reported without saying how it got the information that holdouts including Elliott agreed to sell bonds for $1.4 billion to banks including Citigroup, JPMorgan and HSBC Holdings Plc.

‘Creative Solutions’

NML said in an e-mailed statement early today that Argentina refused to seriously consider a court-appointed mediator’s “numerous creative solutions” for resolving the dispute. NML said it found many of those options acceptable.
The U.S. judge overseeing the case scheduled a hearing in Manhattan federal court tomorrow at 11 a.m. No additional information on the hearing was immediately available.
In the past year, Argentina has taken steps to restore its standing with international creditors after being locked out of credit markets since its $95 billion default in 2001.
Those include reaching an agreement with the Paris Club of creditors to settle $9.7 billion of debt and changing the way it calculated inflation after being faulted by the International Monetary Fund for flawed data.
In May, JPMorgan agreed to buy about $5 billion of government bonds that Argentina gave to Spanish oil producer Repsol SA as compensation for the takeover of its local unit in April 2012.

RUFO Clause

Economy Minister Axel Kicillof told reporters late yesterday that the government couldn’t pay the hedge funds because doing so would require the country to similarly sweeten terms for the 93 percent investors who went along with the country’s debt restructurings in 2005 and 2010 and received about 30 cents on the dollar. That stipulation known as the RUFO clause could trigger claims of more than $120 billion, Argentina has said, dwarfing the country’s $29 billion of reserves. The clause expires at the end of 2014.
Also at issue is whether holders of Argentina’s foreign-currency bonds issued overseas will demand immediate repayment by invoking a so-called cross-default clause in the notes. Under the terms, Argentina would have to pay back the entire balance - - plus unpaid interest -- if at least 25 percent of holders demand that their money be returned. The potential liabilities are equal to the country’s foreign reserves, which are already hovering close to an eight-year low.

Court Stay

“This looks like it could now drag out until 2015,” Kevin Daly, who helps oversee $13 billion of emerging-market debt at Aberdeen Asset Management Plc in London, said by e-mail today. “The risk is that it gets pushed out further, or you get an acceleration demand by an exchange bondholder that adds a new wrinkle to the holdout quandary.”
Kicillof, speaking late yesterday at the Argentine consulate in New York, told reporters that the holdouts rebuffed all offers and wouldn’t endorse a stay of the court ruling that would have allowed more time for talks.
Daniel Pollack, the mediator, wrote in his own e-mailed statement that “real people” are likely to suffer because of Argentina’s default.
“The full consequences of default are not predictable, but they certainly are not positive,” Pollack wrote.
The economy, already headed for its first annual contraction since 2002 with inflation estimated at 40 percent, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump, according to Hernan Yellati, the head of research at Banctrust & Co.

YPF, Edenor

American depositary receipts of oil producer YPF fell 7.3 percent to $36.051 in New York, while ADRs of Empresa Distribuidora y Comercializadora Norte SA sank 9.2 percent to $14.58. In unregulated street trading, the peso weakened 3.9 percent to 12.8 per dollar.
Credit-default swaps to protect against losses from an Argentine default over the next three months had become the most expensive in the world yesterday, according to data compiled by CMA. The five-year contracts were quoted at a cost of $4.2 million plus $500,000 a year to insure $10 million of debt, according to data provider CMA.
About $1 billion of Argentine sovereign debt is covered by the contracts, compared with $10 billion of Russian government obligations and $16 billion of Brazilian debt.
“We’re not considering accelerating our bonds,” Roberto Sanchez, who helps oversee $3.5 billion of emerging-market debt at Manulife Asset Management, said in a telephone interview from Boston. “Things are too fluid to know what the outcome of all this will be.”
(A previous version of this story was corrected to show that Ambito reported holdout creditors were in talks with banks and no final deal had been reached.)