* Doubt over whether CDS referencing sovereign's debt may
* Argentina CDS balloons following legal battle with
LONDON, Nov 22 (IFR) - US District Court Judge Thomas Griesa
ruled late yesterday that Argentina must pay holdouts when it
comes to make regular payments to exchanged bondholders in
This will not apply to a USD42m coupon payment on new 2017
bonds on December 2, but a USD2bn payment due on December 15 to
holders of GDP warrants and a USD200m coupon payment to discount
bondholders on December 31 will not be able to proceed without
also paying the holdouts.
GDP warrants do not count as a debt obligation as far as CDS
are concerned, said Ian Harvey-Samuel, a partner with Shearman &
Sterling, so a missed payment on the warrants would not be
relevant for protection holders. The question of whether CDS
could still be triggered following bond coupon payments is more
of a grey area.
"There are different ways that Argentina might discharge the
liabilities on their bonds that don't necessarily result in
payment to the bondholders. That's not a particularly clear
issue in the way that the trust indentures are drafted," said
Harvey-Samuel, speaking on Wednesday before the latest court
ruling was made public.
In particular, the fact that Argentina is making payments to
bondholders in December via a trustee (BNY Mellon) complicates
matters. If Argentina made the payments to BNY Mellon, which
opted against immediately passing the cash on to bondholders for
fear of incurring the wrath of the courts, it is not clear
whether CDS would trigger as a result of a failure-to-pay credit
"The mere fact that the noteholders don't receive payment
doesn't necessarily mean that there's been a failure-to-pay on
the bond; it would very much depend on the terms and conditions
of the bond itself," explained Harvey-Samuel.
"Until we know what Argentina does and until it asserts its
position with regard to the legal effect on its proper bonds, we
don't know whether or not CDS would trigger."
TRADING THE TRIGGER
Argentina CDS - which has a net notional outstanding of
USD1.8bn according to the DTCC - has become a major focus for
emerging markets traders ever since the New York appeal court on
October 26 upheld the view of Judge Griesa that old bondholders
should be treated equally to those that had agreed to the
Five-year CDS ballooned from 974bp on October 25 to a record
wide of 2,589bp (or around 50 points upfront) on November 16,
according to Markit. It then re-traced slightly on Monday,
before widening again on Wednesday to 2,441bp at close. The US
Thanksgiving holiday means trading is likely to be more muted
"When it was known that BNY Mellon was going to be
implicated in this there was a concern that Argentina may make
payment to bondholders in a way that could technically trigger
CDS, which caused the CDS to gap wider," said Sean Kelly, an EM
credit trader at Credit Suisse, also speaking before the latest
ruling was made public.
"Some of those reservations over CDS have since disappeared,
but we don't see accounts adding new risk positions here. We
mostly see hedge funds taking profits on long protection
positions on the back of the CDS widening."
Some of the activity Kelly saw in the earlier part of the
week related to some accounts selling one-month credit
protection, taking the view that the court would not lift its
stay and Argentina would be free to make its December payments
to exchanged bondholders. Now, such bets could well turn sour
given the latest announcement.
(Reporting by Christopher Whittall; Editing by Sudip Roy)