UPDATE 3-Argentine CDS prices up, trepidation on gov't payment proposal

Mon Apr 1, 2013 6:52pm EDT

By Daniel Bases

NEW YORK, April 1 (Reuters) - Investors bid up the price to insure Argentine sovereign debt on Monday, reacting to a court-ordered payment plan proposal for holdout investors that offers the same terms already rejected in 2010, thereby raising the possibility of a technical default.

According to data provider Markit, the annual cost to insure a $10 million portfolio of sovereign debt for five years rose to $3.424 million from $3.104 million on Friday.

In a filing to the 2nd U.S. Circuit Court of Appeals in New York just before deadline on Friday, Argentina proposed to pay creditors who did not participate in two restructurings through a choice of bonds equal to the debt's value at the time of the country's 2002 default, or through discount bonds.

The plan was under the same terms as those offered creditors during a 2010 debt swap. Argentina defaulted on some $100 billion in sovereign debt in 2002, of which about 92 percent has been restructured.

"The market is showing that it expects the Appellate Court to reject Argentina's payment plan and that will put Argentina one step closer to technical default," said Ignacio Labaqui, who analyzes Argentina for the New York-based emerging markets consultancy Medley Global Advisors.

Last November, a lower court ordered Argentina to pay holdout investors $1.33 billion at the same time it paid bondholders who participated in the 2005 and 2010 debt exchanges. The money was to be put into an escrow account, pending a review by the 2nd Circuit.

The 2nd Circuit decided it would hear an appeal by Argentina over the lower court's payment plan. It had already upheld the lower court's ruling that Argentina violated an equal treatment clause known as pari passu because it failed to treat all creditors equally.

Holdout investors, led by Elliott Management affiliate NML Capital Ltd, and Aurelius Capital Management have fought for years for full payment on debt they acquired either before or after the default. Argentina calls them "vultures" for pursuing full payment.

Spokesmen for Elliott and Aurelius declined to comment when contacted by Reuters to see if they were interested in Argentina's latest proposal.

Markets in Argentina are closed until Wednesday for the Easter holiday.

In New York trading, Argentina's Discount bonds were bid down 1.644 points in price to 52.356, yielding 16.99 percent according to Reuters data. The Par bonds were bid down 0.378 points in price to 31.122, pushing the yield up to 12.54 percent.

Argentina has accused Elliott of trying to engineer a default to profit from CDS. But one source familiar with the case said Elliott no longer holds a position in Argentine CDS, let alone one big enough to make up for its investments.

If Argentina's attempt to pay only exchange bondholders is blocked and the International Swaps and Derivatives Association declares a credit event, or default, has occurred, the maximum payout on Argentine CDS contracts amounts to $1.43 billion. That is the net notional value of the contracts as calculated by the Depository Trust & Clearing Corp.

However, CDS payouts would likely be less after an auction process to determine the recovery value of the defaulted bonds.

"We continue to think that the declaration of a technical default will not generate severe macroeconomic problems in Argentina because the country has been living in financial autarky for years," Miami-based BullTick Capital Markets wrote clients on Monday.

A second source familiar with Elliott's position says repeated attempts to negotiate directly with Argentina's government has been rebuffed or ignored.

In its 22-page submission late Friday, Argentina said that under what it calls the "Par" bond option, the bondholders would receive bonds due in 2038 with the same nominal face value of their current bonds.

The Par bonds would pay interest at a rate that rises from 2.5 percent to 5.25 per annum over the life of the bonds, Argentina said.

Holdouts would also receive an immediate cash payment of past due interest, Argentina said. And they would receive derivative instruments that provide payments when the country's gross domestic product exceeds 3 percent a year.

The holdouts could receive discount bonds due in 2033 that pay at higher rates than the Par bonds, 8.28 percent annually. They would also increase in principal over time.

The holdouts would also receive past due interest in the form of bonds due in 2017 paying 8.75 percent a year, and GDP-linked derivative units.

The Par option is restricted to small investors wanting to tender up to $50,000 per series of bonds, the filing said, while there is no limit on the discount option.

Argentina has vowed never to pay the holdouts the face value of their bonds. It said in Friday's plan that NML paid an estimated 48.7 million in 2008 for its stake in the bonds and could net $186.82 million through the discount option. That compares to the $720 million total it claims in litigation, Argentina said.

Interest payments due exchange bondholders on the Par bonds is scheduled for April 3, a delay of a few days due to the Easter holiday, according to one source at a firm holding the debt. According to data from Bank of America Merrill Lynch, that payment is expected to be $161 million.

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