By Katia Porzecanski, Bloomberg News
July 10 (Bloomberg) -- The market for Argentina’s defaulted debt is drying up as speculation that the government plans a third bond swap fades and the country’s legal battle with holdout creditors from its 2001 default goes unresolved.
Dollar-denominated securities left over from the nation’s $95 billion default have dropped about 7.5 cents on the dollar since April to a mid-price of about 40 cents, according to prices compiled by Seaport Group LLC. Trading in the defaulted bonds is down as much as 50 percent from three months ago, according to Torino Capital LLC. Notes issued in the country’s 2005 and 2010 debt restructurings have lost 2.3 percent since the end of April while emerging-market bonds dropped 9 percent on average, according to JPMorgan Chase & Co.
Argentina’s defaulted bonds rallied to as high as 47.5 cents on the dollar in April on bets that President Cristina Fernandez de Kirchner would open an earlier debt exchange to help resolve litigation with holdout creditors. Investors now speculate the nation may try to circumvent any U.S. ruling that would prevent payments on restructured bonds unless holdouts are paid in full, according to Ben Patch, a managing director of emerging markets at broker-dealer Seaport Group in New York.
“If there isn’t going to be a quick resolution and I want to have a position that’s going to move the needle on my hedge fund or real money account, I have to go to the performing bonds,” Patch said in a telephone interview from New York. “That’s the one thing I can do.”
Yield Spread
Norma Madeo, a spokeswoman for the Economy Ministry, didn’t reply to an e-mail message seeking comment on the government’s plans to pay bondholders. Argentine markets were closed yesterday for a national holiday.
The outstanding litigation has kept the premium investors demand to hold Argentine bonds rather than U.S. Treasuries higher than all of emerging market debt. The average yield on Argentina’s dollar bonds over Treasuries fell six basis points to 1,188 basis points at 8:35 a.m. in Buenos Aires, compared with an average of 351 basis points for developing-nation debt, according to JPMorgan’s EMBI Global index.
The cost of insuring Argentine debt against non-payment for five years with credit-default swaps rose 34 basis points to 2,987 basis points yesterday, according to prices compiled by CMA Ltd.
No Decision
A U.S. appeals court is considering whether to uphold a lower court order for Argentina to pay holders of defaulted debt, including billionaire Paul Singer’s NML Capital Ltd., more than $1.3 billion in principal and accrued interest. If upheld, the order would bar third parties including trustee Bank of New York Mellon Corp. from transferring payments on Argentina’s performing bonds unless holdouts are paid in full.
Speculation Argentina would try to resolve litigation by reopening a debt swap or pay holders of defaulted debt in full spurred demand for the securities earlier this year. On March 29, Argentina submitted a proposal to the appeals court to pay holdouts on the same terms as the restructuring in 2010, valued at about one-sixth of the amount claimed by NML.
Two days later, Argentine Vice President Amado Boudou said the nation will continue making payments on the restructured bonds “no matter what.” Those bonds rallied 9.4 percent in April on speculation Argentina may try to circumvent the courts by removing the bonds from U.S. jurisdiction or designing a local-payment system if it loses the appeal.
Rejected Swap
Trading in defaulted bonds has slowed since then as investors rejected Argentina’s offer on April 19 and Fernandez’s government hasn’t taken any steps to renew the exchange for holders of about $11.5 billion of non-performing debt still outstanding, said Seaport’s Patch. Argentina would have to repeal a so-called lock law that bars paying holdouts without congressional approval.
A surge in Treasury yields is deepening the rout in defaulted bonds as investors avoid longer-dated assets and less liquid securities, according to Jorge Piedrahita, chief executive officer at Torino Capital in New York, a brokerage that specializes in emerging-market debt.
“To buy defaulted debt, you need deep pockets and a long- term horizon, which limits the real demand,” Piedrahita said in an e-mailed response to questions. “When you start to see lack of interest for some name or players retreating from less liquid assets, then the lower the liquidity, the more it suffers.”
‘Upside Potential’
The selloff is an opportunity for investors to buy defaulted debt at a discount to what it would be worth in an eventual restructuring, according to Stuart Culverhouse, chief economist at Exotix Ltd., which specializes in illiquid and distressed emerging-market debt. The same package of dollar- denominated securities offered in the last restructuring is worth about 45.3 cents on the dollar, he wrote in a July 1 report.
“You may have to wait, and wait a bit longer, but I do think there is big upside potential,” Culverhouse said in an e- mailed response to questions.
As a seventh month passes since District Judge Thomas Griesa’s Nov. 21 order to repay holdouts in full without the prospect of another debt swap, holders of defaulted bonds may have to enter into litigation in order to see a payout, said Seaport’s Patch.
“There are no time limits; courts don’t have deadlines,” he said. “If Argentina could retire paper and make this headache go away for other potential plaintiffs, logically they should, but don’t expect them to act logically.”
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