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Post-Chavez Power Struggle Lifts Ally’s Bonds: Argentina Credit

April 19, 2013

The political turmoil in Venezuela that erupted in electing Hugo Chavez’s successor is causing emerging-market debt investors to flood into Argentina, chopping its relative cost of borrowing by the most in four years.

Yields on Argentine dollar-denominated notes fell as much as 2.56 percentage points relative to those for Venezuelan government debt this month, the biggest decline since May 2009. The extra 3.01 percentage points in interest that buyers demanded to own Argentine debt on April 16 was the least since January as speculation that President Cristina Fernandez de Kirchner will default eases and Venezuelan President Nicolas Maduro, handpicked by Chavez before his death in March, struggles to quell opposition calls for a manual recount.

Argentine bonds, which still yield the most in emerging markets at 13.84 percent, are gaining favor among fixed-income investors in developing nations after Maduro’s refusal to recount votes following a 1.8 percentage-point victory against Henrique Capriles on April 14 ignited protests that left eight dead. Speculation is also increasing Argentina will find a way to pay bondholders even if it loses to holdout creditors from its 2001 default seeking compensation in a U.S. court.

“The flow of money is going to Argentina from Venezuela,” Vinicius Pasquarelli, an emerging-market debt trader at Standard Credit Group LLC, said in a telephone interview from New York. “Investors and money holders in Venezuela are running away from Venezuela and they go to Argentina because it offers a better return and less political risk for now.”

Default Risk

Chavez was an ally of Fernandez and her late husband and predecessor Nestor Kirchner. Under Chavez, Venezuela bought Argentine bonds to help the country meet its financing needs.

The risk of an Argentine default as measured in the swaps market reached a three-year-high on Nov. 26 on speculation the nation would suspend payments rather than comply with a U.S. court order to pay holdouts including billionaire hedge-fund manager Paul Singer’s Elliott Management Corp. $1.33 billion.

Since then, Fernandez’s government has offered holders of defaulted bonds the same terms as restructurings in 2005 and 2010 and vowed to continue servicing its performing debt regardless of future rulings.

Yields on the country’s benchmark 2033 bonds have dropped 148 basis points, or 1.48 percentage points, to 15.01 percent since Argentina filed its payment plan March 29 as speculation increased the government will remove restructured bonds from U.S. jurisdiction to continue making payments even if the court doesn’t accept the country’s terms, according to Bulltick Capital Markets.

Payment Pledge

Creditors including Elliott Management’s NML Capital Ltd. and Aurelius Capital Management, which rejected the nation’s debt swaps that imposed losses of 70 percent, have an April 22 deadline to respond to Argentina’s proposal.

Vice President Amado Boudou’s pledge on March 31 to pay restructured bondholders “no matter what” is also helping the bonds pare the biggest losses in emerging markets this year. Argentine debt has returned 9 percent in April, compared with a drop of 19 percent before the proposal was filed, according to JPMorgan Chase & Co.’s EMBIG index.

The 12.01 percentage points of extra yield investors demand to own Argentine bonds over U.S. Treasuries, while the widest among major emerging markets, is less than the four-year high of 13.4 percentage points on Nov. 28.

The gap with Treasuries narrowed three basis points at 3:14 p.m. in New York. Venezuela’s yield differential with Treasuries fell 42 basis points to 8.16 percentage points, up from a four- year-low of 7.05 percentage points on Jan. 3.

‘Firm Hand’

The cost to protect $10 million of Argentine debt against non-payment during five years with credit-default swaps rose 43 basis points to 2,072 basis points yesterday, data compiled by CMA Ltd. show. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements. It costs 811 basis points to protect Venezuelan debt against non-payment.

The peso fell 0.1 percent to 5.1635 per dollar.

While Argentine bonds rebound, Venezuelan notes reversed some gains that led up to the end of Chavez’s 14-year rule. Yields on its benchmark bonds due in 2027 surged the most in almost five years on April 16 after Maduro said he would use a “firm hand” to prevent violence and stood ready to radicalize the socialist revolution.

Adding to Venezuela’s woes is the 7.5 percent decline in oil prices this year. A founding member of the Organization of Petroleum Exporting Countries, Venezuela depends on oil for 95 percent of export revenue.

‘Blowing Up’

“Even if Argentina loses the appeal, I don’t expect things to crescendo before the next coupon payment,” Ray Zucaro, who helps manage $300 million of emerging-market debt at SW Asset Management in Newport Beach, California, said in a phone interview. “Venezuela is blowing up, we don’t know who’s president and oil is getting crushed.”

Argentina’s bonds may be ripe for a selloff because the holdouts will likely reject the proposal, while Venezuelan bonds may rebound as the confrontation between Maduro and the opposition fades, according to Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc.

“For Venezuela, we expect a bounce, predicated on recovery in external risk appetite but not a complete recovery back to previous price highs,” Morden wrote in a report. “Current levels on Argentina are at risk for profit taking ahead of legal deadline.”

Full Audit

Bank of America Corp. maintained its overweight recommendation on Venezuelan bonds, according to an April 15 report.

The gap widened to 376 basis points yesterday from 301 basis points on April 16 after Maduro, who will be sworn in today, agreed to a full audit of the votes cast as the opposition continues to contest the election.

Argentine yields rose above Venezuela’s and have remained higher since Oct. 26, when the U.S. appeals court upheld U.S. District Court Judge Thomas Griesa’s February 2012 ruling that Fernandez must pay holders of defaulted debt, under a clause in the bonds that demands equal treatment among bondholders.

Argentine bonds will continue to rally, shrinking the yield gap further, as concern that Fernandez will halt bond payments subsides and Venezuela remains unstable politically and economically after the disputed election, said Pasquarelli.

“It’s going to be like this for a while,” he said. “In terms of credit risk we should see this spread tightening even more.”

To contact the reporter on this story: Camila Russo in Buenos Aires at

To contact the editors responsible for this story: David Papadopoulos at; Michael Tsang at

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