Small holding could trigger big acceleration on Argentina bonds

Thu Aug 14, 2014 4:05pm EDT

NEW YORK, Aug 14 (IFR) - Owning just US$25m of bonds may be all it takes to accelerate payments on US$30bn of Argentina's restructured debt, if holders of a particularly small series of New York-law Pars decide to pull the trigger.

Among all the bonds eligible to be accelerated, one Par in particular - the US dollar-denominated 2.50% December 2038, on which the sovereign has just US$95.3m outstanding - has been the focus of investor attention.

"We have seen investors taking positions in the smaller series of Par bonds since the beginning of the year," said Jorge Piedrahita, chief executive officer of Torino Capital, a brokerage firm focusing on distressed debt in emerging markets.

"They are paying premium prices for illiquid bonds, but with just US$25m you can effectively control the acceleration process," he said.

After Argentina's July 30 default, investors representing at least 25% in nominal amount of any particular series of restructured notes can declare their principal and interest immediately due and payable, which is known as acceleration.

Excluding certain restructured bonds issued under Argentine and Japanese law, the Par bond identified by ISIN code XS0501195647 is the smallest series outstanding among the sovereign's restructured bonds - and hence the easiest target for acceleration.

"When people were making their bets on acceleration, they were thinking this Par series would be the easiest on which to reach the acceleration threshold," said a hedge fund manager familiar with the situation.

Some restructured bonds issued under Argentine and Japanese law are even smaller in size, but hedge funds would be less willing to litigate under those jurisdictions.

Piedrahita said accounts may have already reached the required critical mass of 25% of face value, as they started accumulating positions as far back as several months ago.

While acceleration on one series does not automatically trigger acceleration on all of them, a cascade effect is likely.

"It is not automatic, but once there has been (acceleration) in one series, everyone else will follow," said the hedge fund manager.

Nearly US$30bn in restructured bonds could be accelerated, which would undermine the sovereign's ability to pay - and potentially trigger another restructuring.

Holders of Argentina's Pars have the greatest incentive to pull the trigger, as the securities they own trade at around 50 cents on the dollar but become immediately due at par if accelerated.

Their claim, however, is somewhat weakened within the first 60 days from Argentina's July 30 default on the Discounts, as any acceleration on the Pars would automatically be reversed if payments on the Discounts resume.

The next coupon payment on the Par bonds is due on September 30. Par holders would be in a stronger position to accelerate after October 30, when the 30-day grace period for the payment ends. (Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Marc Carnegie)