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Argentine Bonds Decline as Default Triggers $1 Billion of Swaps

August 01, 2014

Argentina Default Triggers $1 Billion of Swaps After ISDA Ruling

Argentina's Presient Cristina Fernandez de Kirchner waves to supporters after a ceremony at the government house on July 31, 2014 in Buenos Aires. Argentina blamed the United States Thursday for the legal battle that forced it to miss a debt payment and -- despite ratings agencies' declarations to the contrary -- denied being in default. Photographer: Daniel Garcia/AFP via Getty Images

Argentine bonds posted the biggest two-day loss since 2012 as a committee ruled that the failure to pay interest will trigger $1 billion of credit-default swaps.

The International Swaps & Derivatives Association’s determinations committee made the ruling on the contracts in response to a question posed by Swiss bank UBS AG after the government missed a July 30 payment deadline on $539 million of notes. Argentina is the first nation to trigger the insurance since Greece restructured its debt in 2012.

While Argentina says there was no default since it made the payment to the trustee for the bond, a U.S. judge’s ruling bars it from passing the money to holders without a resolution of the nation’s dispute with hedge funds led by Elliott Management Corp., which won an order for full repayment on defaulted debt from 2001. Benchmark notes due in 2033 declined 2.75 cents on the dollar to 86 cents as of 3:36 p.m. in New York, bringing losses over the two days since the country missed the interest payment to 9.57 cents.

Related: Argentina Unopposed to Bank Deal With Hedge Funds

“It’s a clear default, despite the rhetoric of the Argentine authorities,” Juan Carlos Rodado, the head of Latin America research at Natixis, said in an e-mail.

Following the credit event ruling, the trades will be settled at an auction, ISDA said in a statement.

The process sets a value for the defaulted bonds and then creators of the contracts pay buyers face value in exchange for the underlying securities or the cash equivalent determined at the auction administered by Markit Group Ltd. and Creditex Group.

‘Vulture Funds’

Economy Minister Axel Kicillof called the so-called holdout creditors led by Elliott “vulture funds” this week after failing to reach a restructuring agreement with them to settle claims over the debt they own that Argentina defaulted on in 2001. Kicillof said he suspected Elliott held credit swaps, a market that he said clouds the motives of creditors while leading to “the most wretched speculative capitalism.”

Many bond buyers own credit swaps as protection against losses. The dual roles can skew incentives because creditors will sometimes stand to profit more from a swaps payout than an issuer actually meeting its debt obligations.

Argentina will investigate whether the holdouts’ failure to reach agreement on the debt case was part of a “maneuver” to profit from payouts on the credit-default swaps, the Economy Ministry said in an e-mailed statement on Aug. 1. Local regulators will ask the U.S. Securities and Exchange Commission to help the country establish if hedge funds, either by themselves or through third parties, benefited from the triggering of CDS, according to the statement.

Elliott Denial

Elliott last year denied in a U.S. court that it owned default swaps for Argentina. Stephen Spruiell, a spokesman for Elliott, declined to comment earlier this week.

“Assuming true the rumor that the holdouts held CDS protection, with the trigger, and after the auction, they would have collected some cash and might be more inclined to negotiate a few additional points of discount,” said Jorge Piedrahita, chief financial officer of Torino Capital LLC.

President Cristina Fernandez de Kirchner denied the country defaulted in a nationally televised speech last night and said that though she’s open to further talks to reach a deal with the holdouts, defending the nation’s interests is her top priority and a settlement could trigger additional claims and ruin Argentina.

While Argentine bond prices have been supported by wagers that a deal with holders of debt from the country’s last default was imminent, days of negotiations with the so-called holdout creditors has yet to produce an accord. Standard & Poor’s and Fitch Ratings have declared the country’s notes in default and Moody’s Investors Service placed its rating on negative outlook.

Bank Meeting

The government’s “rhetoric is not just denial but openly contradicting the prospects of a negotiated solution,” Siobhan Morden, the head of Latin America Fixed Income Strategy at Jefferies Group LLC, said in a report.

As optimism fades about a direct deal between the government and the holdout creditors who rebuffed Argentina’s offers in 2005 and 2010 to swap their defaulted debt for 30 cents on the dollar, JPMorgan Chase & Co. and other international banks have been in discussions about a solution to allow the country to resume debt payments, according to a person familiar with the matter.

The group of banks have met with Elliott and other creditors to propose buying the securities they own and settling the dispute, according to a bank official who asked not to be identified because the information is private.

RUFO Clause

Argentina can’t participate in a settlement with the hedge funds because doing so would require the country to similarly sweeten terms for the 93 percent of investors who went along with the country’s debt restructurings in 2005 and 2010, Kicillof said. Those investors got about 30 cents on the dollar.

The requirement, known as the RUFO clause, could trigger claims of more than $120 billion, dwarfing the country’s $29 billion of reserves, he said. The clause is set to expire at the end of 2014.

JPMorgan declined to comment on the speculation about a deal, as did Danielle Romero-Apsilos, a Citigroup spokeswoman.

Aurelius Capital Management LP, which won the lawsuit along with Elliott, said in a statement yesterday that, while it has been approached by private parties, no acceptable offer was made. Elliott’s NML unit, which has been battling Argentina for years in an effort to win payment, declined to comment.

ISDA Committee

U.S. District Court Judge Thomas Griesa said at a hearing tied to the case today that Argentina and the hedge funds should continue talks. He declined Argentina’s request to replace a mediator in the case.

The Merval stock index reversed earlier losses, climbing 1.7 percent.

ISDA’s determinations committee was formed in 2009 and makes binding decisions for the market on whether contracts can be triggered. The 15-member group includes representatives from Bank of America Corp., Elliott, Morgan Stanley and JPMorgan Chase & Co.

There were 2,652 contracts covering $1 billion of Argentina bonds as of July 25, according to the Depository Trust & Clearing Corp. That compares with about $3 billion for Greek bonds when they were triggered in 2012 and $20 billion on Italy’s as of last week.

To contact the reporters on this story: Abigail Moses in London at amoses5@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net; Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net; Brendan Walsh at bwalsh8@bloomberg.net Brendan Walsh, Daniel Cancel


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