ARGENTINA TRIP REPORT-Will The NY Court's "Stay" Stay?

Autor: Matthias Datum: Heute, 20:14

ARGENTINA TRIP REPORT-Will The NY Court's "Stay" Stay? We spent a couple of days in Buenos Aires, meeting local investors, the relevant economic authorities, and a series of local economic, legal, and political pundits. We come back with corroboration of the fundamental view we held before our trip; namely, the level of uncertainty that exists on what the US legal authorities will decide regarding the future capacity of Argentina to service performing NY-law debt remains very high. Therefore, the risk of Argentina being forced by the circumstances into a technical default at some point in the near future remains material. The good news is that we will most likely have some increased clarity of what is to come out of this legal saga this coming Friday (November 16), or at the latest the Monday after. The key issue here, in terms of the upcoming December debt payments, remains whether Judge Griesa will in fact decide to maintain the stay on the decision, until Argentina has been able to utilize all of its different legally entitled appeal options. Precedent would most likely hint that the stay should remain in place until all the appeals have been exhausted, yet the tone of the Judge on the last hearing was somewhat problematic from the standpoint of the interests of the holders of restructured debt. It seems clear to us that the defiant words coming out of Buenos Aires (both, the President and the Economics Minister hinting that they would NOT comply with the Court's rulings if it were to be adverse to the Republic) did not help matters here. The fact that Judge Griesa demanded that Argentina signs an affidavit promising to comply with the decisions that will come out of the Court in the next couple of days is troublesome, not least because we doubt that the Fernandez de Kirchner administration will be willing to sign such document at this time -for local political reasons. In any case, Judge Griesa seems to be quite focused on the idea of moving this legal case forward as fast as possible --hence the announcement that he will announce a decision this coming Friday. An important development that has taken place in the last couple of days is the announcement of the creation of a bond group comprised of performing debt holders (i.e. the holders that decided to tender their bonds in the 2005 and 2010 exchanges), which will take the lead in representing the interest of the owners of performing debt. The group will be represented by the well regarded attorney David Boies. We think that the fact that the holders of performing debt have now become much more involved in this legal story is most likely positive news for performing debt prices, not least because such involvement likely means that there is an increased possibility that this case will actually be granted a hearing at the US Supreme Court at some point in 2013. We expect performing bondholders to argue that an adverse ruling on Argentina would place at risk the savings of many innocent people (savers that invest in funds that hold performing Argentine bonds). Here are some of the key issues that the markets should, in our view, focus on in the next couple of days: 1. Most pundits that we spoke to in Buenos Aires seem to believe, after reading the different transcripts of the New York Court proceedings, that the patience of the NY Court with the Argentina vs. holdout case has reached a limit. At the beginning of the legal process of the different plaintiffs against Argentina, the US courts seemed to be more "understanding" of the situation in Argentina, since the country was immersed in a major economic and financial crisis. Such understanding appears to be gone, more so following the defiant words that came out of Buenos Aires after the decision of the appeals Court was announced. Hence, some pundits did consider that there is a material risk that Judge Griesa may in fact decide that holdout bondholders deserve to receive par-claim (i.e. 100% of what they are asking for) from the Republic. In the end, the argument of the NY Court and the appeals court, which supported the view of the NY Court, is that pari passu was in fact violated following the lack of payment of interests on defaulted bonds and following the approval of the infamous lock-law, and irrespective of the fact that the holders of restructured debt agreed to take a major hit in 2005 and 2010. In short, under the current state of things, if some bondholders are to be paid, all need to be paid, and if some holders are not to be paid, then no holders should be paid. The fact that holdout bondholders are a minority (93% of holders tendered their bonds in the 2005 restructuring and the subsequent 2010 reopening) appears not to be a major concern for the Court at this time. It remains to be seen if that will change going forward. This is clearly a problematic occurrence for the holders of restructured debt, and, in our view, for the international financial system which is looking for alternatives to move forward with more efficient ways to allow countries to restructure in case they enter into duress (this concept is the motivation of, for example, including CACs into sovereign bonds). Also, if holdouts are in fact awarded par claim, why would holders of restructured debt not demand equal treatment? We are clearly not legal experts here, yet we heard that performing debt holders could perhaps not be able to demand equal treatment, as stipulated by the 2005 and 2010 bond prospectus, because it would not be Argentina's decision to offer better terms to the holdouts but rather an imposition by the NY Court. Still, even under the scenario just mentioned, Argentina would still need to derogate the infamous "ley cerrojo" (lock law) in order to be able to pay the holders of defaulted debt. In other words, a situation under which Judge Griesa decides in favor of a payment formula that grants 100% of the claim to the holdout community, and the Republic decides to accept the ruling, appears to remain a logistical and political impossibility. 2. We also understand, after having conversations with different pundits that it really does appear that the monies that are allocated by the Republic at BONY Buenos Aires, and which are later transferred BONY NY in order to service the debt, cannot be attached to pay holdout obligations. In other words, the decisions coming out of the Courts do seem to imply that the capacity of holdout bondholders to attach the monies allocated to performing debt obligations is almost not existent. According to our interpretation of things, it seems to us that the holdout community could, at best, stop the payment of performing debt, but not attach the resources allocated to service such debt, since the monies of Argentina that reach the BONY cannot be touched by any party other than the owner of the respective performing bond. It is important to keep in mind that the holders of restructured debt currently hold a valid contract that was, by the way, "blessed" by the NY Courts (i.e. Judge Griesa) in, both, 2005 and 2010. 3. It seems to us that it is quite unlikely that the decision of the NY Court on the violation of pari passu will be overturned, even if the case reaches the Supreme Court. The reality is that the approval of the lock-law in 2005 did in fact send a negative signal to the international courts, at least under the spectrum of pari passu treatment. Therefore, the best case scenario for Argentina looking ahead appears to be one in which the US legal system affirms the case of holdout investors, but it does so under a "platform" in which the servicing of performing debt is not placed at risk following such decision. Clearly, if there is a technical default, material mark-to-market losses will be incurred by the holders of performing NY law obligations. 4. Most pundits seem to believe that a "proactive" decision by the Fernandez De Kirchner administration to reopen the 2005 and 2010 debt restructuring in an open-ended fashion at this time could help to make legal matters easier. An additional component of such strategy would be to repeal the lock-law and to deposit interest payments on an escrow account as if to pay the totality of the holdout investment community. Under such scenario, US courts could perhaps decide to be more lenient with Argentina. The problem with this strategy is that it would likely encounter a common constraint: local politics. Such an "engaging" strategy could be understood by the local press, and other relevant political agents, as a sign of political weakness (by the Fernandez de Kirchner administration). 5. The Argentine government appears to be ready to try to follow all the legal avenues available to appeal this legal decision. As implied by the title of this piece, there is a risk that judge Griesa will decide to lift the stay on the current process after he makes his decision this Friday or the following Monday, an issue that could, in theory, place at risk the December payments (GDP warrants and two different interest payments on outstanding bonds). Naturally, assuming that the appeals court also decides to follow an expedited study of this issue and delivers a view before December 2. The language of Judge Griesa on whether the stay would remain in place during the appeals process is quite inconclusive. 6. What happens if Argentina runs out of legal avenues to challenge the ruling of the District Court? Locals seem to consider that the President will NOT backtrack on her words on not paying the holders of defaulted debt (holdouts). Hence, if we do get to that situation, Argentina would have no choice but to look for alternatives to change the payment logistics on performing bonds. We heard of the possibility of asking the BIS or the Bank of France to take care of the payment logistics, of course, assuming that Argentina is in fact able to convince a qualified majority of holders of NY-law debt do vote in favor of amending the payment rules and jurisdiction. MARKET IMPLICATIONS As investors know, the market implications of what is happening with Argentine debt at this time are clearly quite material. For example, since the news on the decision of the appellate court came forward, the NY Law USD-denominated discounts (2033's) have lost around 35% of their value, and USD-denominated, NY Law GDP warrants have given up 18% of their value. Despite the sell-off, it is important to reiterate that Argentina has a very low debt/GDP ratio, and that the country does not need to issue new debt to pay for the upcoming amortizations. According to the latest version of the quarterly document on the stock of gross public debt of the Republic (Q212), the load of debt had stood at 41% of GDP in Q212, with the public sector itself holding 22.8% of GDP of the debt load and the multilateral credit organizations holding 5.7% of the debt. This means that the private sector itself only held 13% of GDP in public debt obligations. Clearly, then, the actual capacity of the credit to pay its obligations continues to look quite comfortable. Also of relevance, according to the official information presented by the Finance Secretary Office of the Ministry of Economics, the country will only amortize about USD $3 billion (0.5% of GDP) with the private sector during 2013. In terms of interest payments, the amount due to the private sector in 2013 stands at around USD $2.5 billion. We come back from Buenos Aires with the view that non NY-law Argentine sovereign debt is not at risk of not being paid, at least not from a logistical standpoint. The markets also seem to agree with such a view, judging from relatively outperformance that Argentina-law USD-debt has shown in the past few weeks versus NY-law (ex-post the decision from the appellate court). Clearly, if Argentina does enter into a technical default, following an aggressive decision out of the NY Court and an equally antagonist response from the Fernandez de Kirchner administration, markets will sell-off even further, not least because CDS triggers could feasibly come into play. That said, as argued before, this technical default would most likely occur under an environment in which the Republic continues to pay ALL of its debts. Specifically, we do think that regardless of how the final decision of the NY Court looks like, the government will deposit the December payments in the BONY accounts in Argentina (so that they can be transferred to NY by the BONY), in that manner forcing a confrontation among the holders of performing debt, the holdouts, the BONY, and the NY Court system itself. Despite everything that is happening, we stand by our long-standing view on this very high-yielding credit. Despite the volatility of news and policies, (1) the yield that Argentina assets deliver is immense, (2) Argentina's public debt/GDP ratio in the hands of the private sector is extremely low (13% of GDP), and (3) the country will most likely continue to enjoy from the positive tail winds of a rebounding Brazilian economy and the lingering of sufficient consumption growth in China --one that will keep the demand for agro-industrial products on the high end. Finally, even if Argentina does enter into a technical default, most local pundits seem to believe, and we agree with such view, that the effects on the domestic economy are unlikely to be too harsh. For example, we sincerely doubt that a bank run will materialize if a technical default does take place in the next few days, not only because the exposure of the local banking system to NY law obligations is low, but also because the system is not leveraged. One big casualty of this saga will be the intention of YPF to tap international markets in order to raise capital to develop the "vaca muerta" field. This is clearly bad news for Argentina's future economic performance, since the energy situation of the country is already quite tight, and new investment on the sector remains sub-par. Bulltick gestern