Yen bonds create Argentina CDS auction uncertainty

Fri Aug 15, 2014 9:46am EDT

LONDON, Aug 15 (IFR) - The final list of securities that can be delivered into the credit auction to settle credit default swaps linked to the Republic of Argentina may not be published until a day before Thursday's auction, adding to uncertainty over the final recovery price.

After excluding four Japanese yen-denominated par bonds from the list of deliverables due to a lack of documentation, ISDA's Credit Determinations Committee last week received a request to incorporate the 0.45% due 2038 yen bonds alongside a copy of the prospectus for the 2005-issued securities.

Market participants had until 5pm New York time last Friday to submit any additional bonds for consideration and a further three days to challenge the list. ISDA then has an additional two days to publish the final list, pushing the deadline to as late as Wednesday - just one day ahead of the auction on August 21.

"All the documentation has been sent to ISDA and that should be sufficient to include the yen bonds in the list," said an emerging markets credit analyst at one US house. "The real question is how much of the yen bonds will actually be available for the auction. They are very illiquid and probably very tightly held by Japanese retail."

MIND THE PRICE GAP

The ISDA Credit Determinations Committee judged earlier this month that Argentina failure-to-pay credit event after the sovereign after the sovereign failed to pay a US$539m coupon on its restructured bonds

As the cheapest-to-deliver, the yen bonds would typically be delivered into the auction to determine the final recovery price. However, with just over US$200m outstanding, compared to US$900m net notional of CDS to be settled according to data from the DTCC, they are unlikely to go far in covering the imbalance between buy and sell orders at the end of the first auction phase.

Given their low 0.45% coupon, the yen bonds currently trade around 23 cents on the dollar, compared to 48 cents for the euro par bonds, which analysts see as the next cheapest-to-deliver securities. The huge gap between prices of the two likely deliverable bonds makes Argentina's auction unusual in its uncertainty.

However, market activity suggests that dealers and investors are largely ignoring the impact of the yen bonds on the final price. Following last Thursday's announcement of the supplementary list, recovery locks on the debt hardly moved, shifting from 42-45 to 42-44.

"The fact that recovery has traded fairly consistently suggests that there aren't enough Japanese yen bonds out there to clear the open interest and that the euro par bonds will ultimately be used to settle," said the analyst.

Inclusion of the yen bonds is likely to result in dealers submitting second-phase orders somewhere between the two prices, with the final price likely to edge towards the euro par bonds - in the mid to high 40s - depending on the volume of yen securities delivered.

"If you own the Japanese yen par bonds, this could be a great opportunity to settle at a higher price than you would get in the secondary market and that might bring more of those bonds into the auction than many anticipate," said the analyst.

"Likewise, if you're looking at the euro-denominated par bonds, it could be a great opportunity to buy." (Reporting By Helen Bartholomew, editing by Christopher Whittall)