* Argentina risks default; U.S. court showdown set for Feb.
* Funds find trades in local-law, provincial bonds
* Uncertainty prompts some hedge funds to sell out of
* Others battle each other over Argentine debt
By Tommy Wilkes and Laurence Fletcher
LONDON, Feb 8 Hedge funds are actively trading
in Argentina's choppy markets ahead of its legal showdown with
rebel sovereign bondholders later this month.
Investors and creditors are waiting to see if a U.S. court
upholds a ruling on Feb. 27 that prevents Argentina from paying
holders of bonds issued in debt swaps in 2005 and 2010 until it
pays interest and principal due to so-called "holdout"
creditors who had refused to swap.
Argentina has persistently refused to pay these holdouts who
range from Argentine pensioners to NML Capital, an affiliate of
activist fund Elliott, which last year detained an Argentine
ship in Ghana, demanding it be paid some of what it is owed.
As the two camps square up again hedge funds are taking
advantage of the exit of other investors scared of a technical
default by Argentina if the country is prevented from making
further bond payments.
"Every couple of months there is something happening in
Argentina - YPF, Elliott, economic data. It makes for a very
volatile market, which we love," said Francois Buclez, chief
executive of hedge fund firm Cube Capital.
Last year the left-leaning Argentine government seized
energy company YPF from Spanish oil firm Repsol. And last week
the International Monetary Fund reprimanded the country for
inaccurate economic data.
Buclez bought June 2017 bonds issued under internatial law
at around 80 cents on the dollar late last year,
later selling most of them at around 86 cents.
He is looking for another chance to buy as he thinks
negotiations between Argentina and NML could drag on for three
to six months. The bonds now trade at around 78 cents.
"It's an interesting market to trade but not necessarily to
buy and hold," he added. "Most investors have exited because of
the binary nature of the market. We still have a little bit (of
the bonds) as we like the yield of 15 percent."
Buclez also profited by betting the cost of debt default
insurance would fall, after U.S. district Judge Thomas Griesa in
November ordered the country to pay $1.33 billion into escrow
for holdouts when it paid restructured bondholders.
The cost of insuring Argentine debt rocketed
on the news to around $3 million to insure $10 million of debt
against default, from less than $1 million. It fell back to just
over $1.3 million when the 2nd U.S. Circuit Court of Appeals
later delayed that decision so Argentina could appeal.
H2O Asset Management senior fund manager Loic Cadiou, who
took part in the 2005 sovereign debt exchange but later sold
out, has avoided international-law bonds because of the price.
But he said the legal uncertainty has created trades in
local-law sovereign bonds and bonds issued by Argentine
provinces, as neither are directly affected by the U.S. courts.
Two weeks ago he bought into the dollar-denominated
local-law 2015 bonds as "a tactical trade",
citing their liquidity and selling by other investors.
"It's very difficult to know what will happen (in the U.S.
judgment), unless you're a legal expert," said Cadiou. "The
ruling has created a significant risk premium in all Argentine
assets ... (But) you probably don't want to have the external
debt if you don't want to be exposed to the ruling directly."
The U.S. court decision effectively pitches hedge funds such
as NML and Aurelius against funds such as Gramercy, a veteran of
sovereign debt restructurings, Brevan Howard and MFS. However,
some prefer to avoid the bonds altogether for now.
Julian Adams, chief executive at London-based Adelante Asset
Management, is one of several fund managers to have sold
positions in Argentine international-law bonds in January
because of the legal risks.
"We re-looked at the dynamics of the court process. Most
analyses that say it's worth holding Argentina are based on
there being an injunction on the clearing system. It's a very
tough call," he said.
Pharo Management, a $3 billion emerging markets firm, is
among those mulling selling down its Argentine debt, two sources
familiar with the fund said. Pharo declined to comment.
Some have sought protection from the U.S. courts by moving
out of dollar-denominated debt and into euro-denominated debt,
another investor said, believing legal protections are stronger.
The uncertainty highlights the big risks of investing in
emerging market debt just when more and more traditional funds
are moving in in their global hunt for yield.
"It's hard enough focusing on when countries will make
(bond) payments, it's quite another thing focusing on when
countries will make payments because there is a legal issue,"
said Michael Mabbutt, head of global credit at fund manager
Liontrust, who has avoided the bonds.