UPDATE 2-Latest twist in Argentina saga raises hopes of deal

Wed Jul 30, 2014 2:09pm EDT

(UPDATES throughout)

By Joan Magee and Davide Scigliuzzo

NEW YORK, July 30 (IFR) - Last-ditch efforts by Argentina's local banking association Adeba to act as a white knight in talks with creditors has raised hopes the country can avoid a second default in 13 years.

Economy Minister Axel Kicillof was in New York meeting face to face with holdout creditors amid hopes that an offer from Argentine banks to stump up cash in escrow could save the day.

Negotiations are now revolving around how much local banks need to deposit as a goodwill gesture to give Adeba time to negotiate a way to pay holdouts themselves. By having banks satisfy such claims instead of Argentina, the government may find away around the so-called RUFO clause.

Argentina argues that the so-called RUFO (Rights Under First Offer) clause prohibits it from voluntarily paying the holdouts, who are demanding full payment on their bonds, better terms than the 25 to 29 cents on the dollar the other investors accepted.

"The RUFO clause has become Argentina's straw horse," said a source close to the talks.

"They're so paranoid about the RUFO clause and want to figure out a way where they can avoid default and not violate the RUFO. From their perspective, it's a possible solution."

Argentina fears that it may face billions of dollars of claims from investors who accepted the restructuring should it pay the holdouts in full.

The apparent hope is that funds provided by local banks would get around the legal technicalities of the clause - and appease holdouts enough that the US courts allow a debt payment of its restructured bonds to go through and avoid a default.

The grace period for that payment expires at midnight on Wednesday.

Local Argentine press outlets reported that domestic banks are willing to deposit US$250m-US$300m in an escrow account to help get a deal done.

At the moment, both sides are trying to determine whether that amount is large enough to act as a goodwill gesture, and that depends on estimates over the size of any potential liabilities in the event that the RUFO clause is exercised, the source said.

That tally is being estimated as somewhere between US$6bn to US$20bn, according to both analysts and sources close to the talks.

On the higher end, RUFO liabilities would include notional amounts outstanding for the restructured bonds, both the Pars and Discounts under New York law and dollar-denominated and Argentine law dollar-denominated bonds. Of that, New York-law bonds account for around US$12bn.

Should a deal be hammered out today, Argentina would in theory have time to figure out how to avoid any RUFO claims before the clause expires at the end of the year, or to collect enough waivers from bondholders to make the clause obsolete - something that certain holders have already proposed this week.

Amid all the last-minute horse-trading, Argentine debt has rallied.

The Discount 2033 notes were trading up as much as 8 points today at 92.25, while the Par 2038s rose by around 4 points to a bid price of 51.75, said traders.

Its Bonar 2024s were trading up 6.5-7.0 points this morning to 99.00-100.00, one trader in New York said.

"The bonds are moving so quickly that we have no idea where they will end up now that Axel is in town," the trader said. "He's the one who is seen as the dealmaker, and the one who makes the decisions."

Argentina's five-year credit default swaps were quoted 321bp tighter on the day at a spread of 1574bp, with other traders seeing it as tight as 1554bp.

"The failure to broker a deal will question whether the RUFO is the only concern and hence suggests more downside risk post-default," said Siobhan Morden, head of LatAm strategy at Jefferies. (Reporting by Davide Scigliuzzo and; Joan Magee; Editing by Paul Kilby and Marc Carnegie)

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