July 29, 2014 / 5:20 PM / in 4 years

As Argentina stares down deadline, one group will make default call

July 29 (Reuters) - As Argentina’s options run out as the clock ticks down to the deadline before a default, attention is turning to the committee that makes the “official” call on such matters - even though that call is really only for the benefit of those investors who bought insurance in case of non-payment.

Argentina is out of legal options to avoid paying a court-ordered $1.33 billion, plus interest, to the holdout creditors who declined to restructure their bonds. If the payments are not made, the country will have defaulted on its debt obligations for the second time since it missed a payment in January 2002 that affected roughly $100 billion in sovereign debt.

The actual determination of default is made by the International Swaps and Derivatives Association, which says whether a default, or credit event, has occurred for those who bought credit-default swaps, known as CDS and which is insurance that protects investors against such an occurrence. If that happens, the amount that would be paid out to investors who insured their Argentine debt is a bit more than $1 billion. By way of comparison, the net notional value of Brazil CDS is more than $16.8 billion.

ISDA usually makes a determination after a specific request by a holder of credit-default swap contracts; if the parties are still in talks, there might be some wiggle room. For bondholders without insurance, there’s no real official call on default. It is simply the passage of the deadline and no payment showing up in creditor accounts.

Argentina attempted to pay a scheduled interest payment due June 30 to the bondholders who accepted restructured debt in 2005 and 2010 by transferring $539 million with indentured trustee Bank of New York Mellon’s account at the Central Bank of Argentina.

But that money was not transferred to investors because U.S. District Judge Thomas Griesa ruled that the country has to pay all investors, including the holdouts. The holdouts are led by NML Capital Ltd, an affiliate of New York-based hedge fund Elliott Management Corp, and Aurelius Capital Management, another New York-based hedge fund.

The 30-day grace period expires Wednesday at midnight EDT - and that’s where things get fuzzy.

ISDA’s determinations committee would consider “whether there is a ‘failure to pay’ credit event,” according to market participants. Argentine officials have said they have paid - because they deposited the money with BNY Mellon - but market participants say Argentina’s position isn’t relevant to the committee’s decision.

At that point, though, one of the CDS holders needs to pose a question to the determinations committee through ISDA’s website - a public spot where investors can ask anonymously if such an event has occurred. The process then moves somewhat quickly; the determinations committee could meet as soon as the next day.

An ISDA spokesman said determination on defaults can be held via a conference call.

Investors may choose to move quickly if there is no payment by the end of Wednesday.

“My view is that ISDA will say it is a default if the money doesn’t arrive by the end of the day, and then it will be litigated by the people on the wrong side,” said Varun Gosain, a portfolio manager at New York-based Constellation Capital Management who participated in the debt exchanges. Constellation has investments in Argentine assets.

“Given it is so focused on the fact that you have this issue and it is not resolved, I would be inclined to think more likely than not it would be considered a default and no matter what the outcome is, it is going to litigated.”

There are five determination committees, each with 15 voting members, representing various regions of the world. The committee for the region in question votes on default, with 12 of 15 needing to vote in favor. Elliott is slated to become a member of the determination committee in all regions in November. (Reporting by Daniel Bases in New York; Additional reporting by Carolyn Cohn in London and Sarah Marsh in Buenos Aires; Editing by Leslie Adler)

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