El Cronista Local law vs. New York law: the gap in yield from bonds has almost evaporated

El Cronista

Local law vs. New York law: the gap in yield from bonds has almost evaporated

 

Thursday, August 8, 2013

 

By Mariana Shaalo

 

The perspective that the Supreme Court of New York (sic) will accept taking a position in the case between Argentina and the holdouts and that as such the period of time for a decision will be longer has made yields for bonds with New York law fall to an eight-year low and has tightened the gap with those under local law on Wall Street.

 

For the first time in months, the yields on Argentine bonds with New York legislation fell below those governed by Argentine law on Wall Street.  In particular, the Par coming due in 2038 that is governed by Argentine law yields 11.66% while the Par with New York law now gives a return of 11.23%.

 

The yield for the Discount with New York law fell to 14.16% versus 13.3% that the same bond governed by local legislation offers.  The difference in the yields is already less than 100 basis points when in March it was more than 300.

 

The reason behind this phenomenon is that investors are betting on the possibility that the Supreme Court will take the Argentine case despite only taking 1% of the 8,000 petitions that it receives per year approximately, due to rumors that indicate the support of France to the restructured bondholders of Argentina increased the chances, according to Greylock Capital Management.

 

“The movement in price shows that there is less concern over a default,” said Diego Ferro, co-director of investments at Greylock Capital Management in statements to Bloomberg.  “When demand for Argentina grows, the margin goes in favor of those governed by New York law and the opposite happens when there is a sell-off.  I wouldn’t touch those with local law,” he pointed out.

 

“The benefit of maintaining Argentine bonds with New York legislation is high in our opinion, if the delay in the ruling means getting another year of coupons and bigger backing to deal with a fall in prices from restructured bonds,” said Jane Brauer, fixed-rate strategist at Bank of America in Nueva York.

 

The only bond maintaining a big spread with its local counterpart is the Global 2017, which yields 16.5% versus the 12.4% that the Bonar X offers with an identical expiration date.

 

Starting with the ruling from the Court of Appeals at the end of last year which upheld the sentence of lower court Judge Thomas Griesa in favor of the vulture funds, the yields on the bonds with New York legislation were systematically higher than those with Argentine legislation.

 

The trend is explained more by the rise in returns from bonds that could be affected by an unfavorable sentence in the United States than by a drop in those from local jurisdiction.

 

Because of this in October last year, before the appellate court ruling, the Discount with Argentine law yielded 13% while the Discount under New York jurisdiction offered a 10.6% return.  While the yield on bonds governed by Argentine law almost didn’t move, the yield on the others went up almost 400 basis points.