REFILE-Argentina CDS prices near 4-year high in thin trade

Mon Oct 29, 2012 2:53pm EDT

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By Daniel Bases

NEW YORK Oct 29 (Reuters) - The price to insure Argentina's sovereign credits soared to a near four-year high on Monday in thin market conditions following a crucial ruling by a U.S. court last week that said all bondholders must be treated equally.

The low trading volumes were caused by the shuttering of Wall Street as Hurricane Sandy, a massive storm battering the U.S. East Coast with fierce winds and driving rain, prompted officials in New York to close the major transportation systems.

"Because it is quite a thin market, there is a lack of depth in the market and you can get some volatility," said Gavan Nolan, director of credit research at Markit in London.

The cost for investors holding the debt rose to 1,563 basis points, that's still well below the all-time high of 4,133 basis points recorded in December 2009, according to Reuters data .

Under current prices, an investor would have to spend $1.563 million every year for five years to insure $10 million worth of Argentine sovereign credit over that time period.

The biggest price spike occurred on Friday following the appeal court decision, when prices rose 482 basis points to close at 1,457 basis points, according to Markit's data.

The most recent peak in Argentina's 5-year CDS was June 1, 2012 when the price hit 1,535 basis points.

The 2nd U.S. Circuit Court of Appeals in New York said on Friday that Argentina improperly discriminated against bondholders who refused to take part in two massive debt restructurings following a $100 billion default a decade ago.

Over 90 percent of the debt was restructured when bondholders agreed to terms set by the government in 2005 and 2010.

The ruling said Argentina's decision to pay holdout bondholders later than bondholders who agreed to participate in the restructurings violated provisions that required the country to treat bondholders equally.

Friday's decision largely upheld injunctions issued in February by U.S. District Court Judge Thomas Griesa in Manhattan in favor of holdout bondholders, often referred to as 'vulture' investors because they bought the debt at discounts to the par value.

"The fact that the bond holdouts have won their case does create uncertainty and risks around how Argentina is going to deal with this," Nolan said.

Barclays Capital, in a research note on Monday, recommended investors buy protection and move Argentina's debt to an underweight asset allocation position in its model credit portfolio.

"As markets had priced in minimal chance of such a ruling by the Court of Appeals, the outcome was a surprise," Barclays said.

In response to the court ruling, Argentina's Finance Secretary told Reuters on Friday the country would take all the legal steps necessary to contest the decision.

The ruling now goes back to Judge Griesa who was asked to clarify how the payment formula is intended to work, and how the injunctions apply to third parties such as intermediary banks.

An analysis by Citi points out that if the court's order, which only applies to a subset of judgments against Argentina, is carried out, there could be wider implications for the entire debt stock.

The bank points out the official statistics showing that after the 2010 debt exchange, Argentina estimated $6.6 billion of untendered principal outstanding and $4.6 billion in unpaid interest, as of the end of last year.

"If the appeals court upholds the revised order, we may see a cascade effect for a number of other untendered bonds requesting similar treatment," Citi said. (Reporting by Daniel Bases, Editing by Gary Crosse)

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