Kames Capital’s Phil Milburn believes the ongoing court case in the US between Argentina and holdouts to its sovereign debt default restructuring proposals will throw up further opportunities around the mispricing of emerging market debt risk.
Milburn closed the credit default swap (CDS)-based short on hard currency sovereign emerging market debt held in his Kames Strategic Bond
+
fund on 2 April in a timely move, a day after Argentina’s five-year CDS spread hit 3,500 basis points (bps).
This latest spike, which mathematically equated to a 91% probability of default within the next five years, came ahead of the latest round of the legal battle between Argentina and bondholders. But Milburn was concerned that with such a negative outcome in court already priced in, a retrenchment was likely.
He has been proven right.
On 20 April, a court in New York threw out in dismissive fashion Argentina’s appeal against its latest offer which was deemed illegal last October. The South American country has been involved in a long-running legal battle with bondholders who rejected its restructuring when it defaulted in 2002.
Rule of law
The latest offer was worth less than 15% of the sum claimed by those who held out and refused the restructure. The court ruled that Argentina cannot treat these debtors less favourably than those who have accepted the restructure, with the judge saying: ‘With its latest submission in this court, the Republic of Argentina continues its long and consistent pattern of defaulting on its contractual obligations, defying the laws of the United States and showing contempt for the courts to whose jurisdiction it unreservedly submitted.’
The judgment had been widely anticipated, with US judiciary apparently angered by Argentina having written the contracts in accordance with US law and then later refuting its judgments.
Emerging market spreads have since pulled back significantly and Milburn is again eyeing up potential entry points back into this trade.
‘I still believe Argentina will default again in the next few years,’ he said.
‘Argentina only represents 6% of the CDX Emerging Market index and there is room for the mispricing of risk in the other 94% to correct.’
Keine Kommentare:
Kommentar veröffentlichen