Bloomberg News

Argentina Default Swaps Traders Lose 81% as Risk Recedes

December 03, 2012

Swaps Traders Lose 81% as Default Risk Recedes: Argentina Credit

Argentina's President Cristina Fernandez de Kirchner says her country will pay its performing debt. Photographer: Juan Mabromata/AFP/Getty Images

Traders who bought three-month protection against an Argentine default lost 81 percent of their money in the two days after a U.S. court delayed a ruling that could have blocked payments to bondholders.

The cost to insure $10 million of Argentine debt against non-payment through March has plunged to $651,389 from $3.5 million on Nov. 28, according to SW Asset Management LLC. The selloff came after a U.S. federal appeals court stayed District Judge Thomas Griesa’s decision that would have forced the country to pay so-called holdout creditors from its $95 billion default in 2001 before holders of its restructured bonds.

Speculation that Argentina would opt to default for a second time in 11 years rather than settle with the holdouts caused the nation’s bonds to tumble by the most in emerging markets last month. While President Cristina Fernandez de Kirchner says her country will pay its performing debt, she has vowed never to give in to the demands of investors including billionaire Paul Singer she has dubbed “vultures.” Argentina is still more likely to renege on payments than any country in the world, according to the credit-default swaps trading.

“People that bought protection due to the unnecessary volatility and extremely aggressive stance by Griesa’s mandate suffered significant losses based on the second court’s move,” Ray Zucaro, who helps manage about $240 million of emerging- market debt at SW Asset, said in a telephone interview from Miami. “The three-month collapsed.”

Norma Madeo, a spokeswoman at the Economy Ministry, declined to comment on Argentina’s bond payment plans in an e- mail.

Uninterrupted Payments

The court’s decision to stay the judge’s orders and set a Feb. 27 hearing for the government’s appeal ensures investors will be paid this month, according to Zucaro.

Argentina was scheduled to make a $42 million interest payment yesterday on bonds due in 2017.

Argentina will also pay about $3 billion on securities linked to economic growth on Dec. 15 and has a $600 million interest payment due for holders of bonds maturing in 2033, according to the Economy Ministry.

The upfront price of one-year protection with credit- default swaps rose to a record 51 percentage points on Nov. 26, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Saved Coupons

“Griesa was pressuring for an expedited decision to be completed by December 15th,” which would coincide with interest payments, Jane Brauer, a fixed-income strategist at Bank of America Corp., said in a telephone interview from New York. “Now they basically saved all the December coupons.”

The warrants, which were issued as part of Argentina’s debt restructuring in 2005, rose 1.7 percent to 11.92 cents on Nov. 30 after surging a record 23 percent to 11.72 cents the previous day.

Contracts tied to Argentine bonds were the seventh-most actively traded sovereign swaps in the week ended Nov. 23, according to the latest data from the Depository Trust & Clearing Corp., which runs a central credit-swaps repository. Investors bought 127 contracts, about seven times the average amount among single-name contracts traded that week, with a gross notional value of $595.7 million, according to the DTCC.

Banks, hedge funds and other institutional investors had bought or sold a net $1.68 billion of default protection for Argentine debt as of Nov. 23, according to DTCC. That compares with $17.2 billion for Brazil and $2.01 billion for Venezuela.

‘Wiggle Room’

The rising demand for protection “reflects that Argentina has very little wiggle room in the legal episode and the probability that they are going to choose an avenue of potential technical default is very high,” said Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal, in a telephone interview.

The extra yield, or spread, investors demand to hold Argentine debt over U.S. Treasuries surged to a three-year high of 1,340 basis points or 13.4 percentage points on Nov. 28 before the ruling was stayed. The spread has narrowed 201 basis points to 1,139 since then.

The peso weakened 0.1 percent to 4.8412 per dollar at 4:03 p.m. in Buenos Aires.

Swap contracts allow investors “to sleep well at night for the next three months,” Russell Dallen, head bond trader at Caracas Capital Markets, said in a telephone interview from Miami. “Who are we to say that their money wasn’t well spent? I pay for a life insurance policy every year, but I’m thankful that it isn’t used.”

More Volatility

The three-month contracts offer protection through March 20 of next year, and will expire before the country is due to make an $84 million interest payment on its dollar-denominated par bonds on March 31. That’s the first coupon Argentina is scheduled to pay after the Feb. 27 hearing, and could be blocked if the appeals court upholds Griesa’s Nov. 21 orders.

There will be more volatility in market prices as the holdouts, led by Singer’s NML Capital Ltd. and Aurelius Capital Management, ask the appeals court to lift the stay, according to Bank of America’s Brauer.

On Nov. 30, NML filed an emergency motion to amend the appellate court’s order, asking the judges to require that Argentina post $250 million in order to maintain the stay.

“We expect a lot of noise -- it’s not going to be really quiet between here and February,” Brauer said.

To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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