Argentine bonds: Some are not like the others

Argentina’s lowest-priced bonds are holding up the best following the country’s default last month.

The South American nation’s notes maturing in 2038, known as Par bonds, have lost 6.5% to 52.88 cents on the dollar since the government was blocked from making a payment on its debt last month. That compares with a 11.6% plunge on its notes due in 2033 and an 8.3% rout on securities that mature in 2017.

While the best-case scenario for investors would be for the government to reach a deal that would allow it to resume paying the bonds, the lower-priced notes would offer better returns if that effort fails and investors instead demand that Argentina immediately repay them, according to Torino Capital LLC and Bulltick Capital Markets. In that situation, called acceleration, investors would demand 100 cents on the dollar for their securities plus past-due interest.

“All Argentine bonds are holding up well, considering the country just defaulted, as everyone expects a deal,” said Jorge Piedrahita, the chief financial officer of Torino Capital in New York. “But in the case of the Pars they have their own dynamic linked to the fact that investors would also make a good profit if they negotiated a restructuring with the government.”

Argentina was blocked from making a $539 million interest payment by a U.S. court order that stems from a lawsuit brought by holders of debt it defaulted on in 2001. Those so-called holdout creditors, led by hedge-fund operator Elliott Management Corp., refused to accept new bonds worth about 30 cents on the dollar in restructurings in 2005 and 2010 and instead sued for full repayment and won. Until Argentina pays them or reaches a settlement, the nation can’t pay interest on any of its overseas debt.
 

Private Talks
 

The South American nation has so far refused to pay the $1.5 billion that the holdouts are owed and says it can’t settle with them without exposing itself to an additional $120 billion in claims from investors who would want a better deal after agreeing to the earlier swaps.

While direct talks between Argentina and the hedge funds that sued have stalled, international banks including Citigroup Inc. and JPMorgan Chase & Co. are looking to put together a group of investors to buy the defaulted debt and resolve the U.S. lawsuit blocking it from paying bondholders.

The banks may provide financing for a part of the debt purchases, according to a banker familiar with the talks, who asked not to be identified because the discussions are fluid and subject to change. The deal has been difficult to complete because the buyers don’t know how much Argentina will eventually pay for the debt, the person said.
 

Foreign Reserves
 

Argentina’s benchmark bonds due in 2033 gained 0.1 cent to 86.11 cents on the dollar at 8:42 a.m. in New York. The Par notes due in 2038 gained 0.03 cent to 52.91 cents.

The country would be on the hook for $29 billion if all of its foreign currency debt is accelerated. That amount, equal to the nation’s foreign reserves, could force a restructuring into bonds covered by local law and outside the jurisdiction of U.S. courts, which would carry a recovery value of about 70 cents on the dollar (NYBOT:DXU14), according to Piedrahita.
 

Default Swaps
 

Argentina’s 2038 bonds are also attractive for investors who want to deliver the bonds in exchange for payment on the country’s credit-defaults swaps, according to Barclays Plc. A committee at the International Swaps and Derivatives Association ruled on Aug. 1 that a credit event had occurred in Argentina, triggering $1 billion of swaps.

Outperformance on the Par bonds “shows there may be a strategy to accelerate,” Joaquin Almeyra a fixed-income trader at Bulltick Capital Markets in Miami, said in a telephone interview. “In that case, the government should be under even more pressure to find a solution quickly.”

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