By Daniel Bases
NEW YORK, April 1 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
"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
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
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
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
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,
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,
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.