NEW YORK, Feb 3 (IFR) - Argentina's New York-law sovereign bonds outperformed on Wednesday thanks to growing belief that a settlement with the country's holdout creditors could be on the cards.
Although worries about a sudden glut of supply kept a cap on enthusiasm, the New York-law Discounts were 75 cents higher to be quoted at 115.50-116.50.
Meanwhile Argentina's local-law Bonar 2017s were closing flat at 102.00-103.00.
The sovereign is holding talks in New York this week with the holdouts, and news that it has agreed to pay Italian creditors holding defaulted bonds added to the optimism.
Argentina's finance ministry said on Monday that a formal offer to holdouts could be on the table this week.
"Since they reached a deal with the Italian holders, we have seen more strength than we had previously," one New York-based broker told IFR.
But negotiations over what is now some US$9bn in unsettled claims are expected to be tough, and the legal battle has now dragged on for years.
The New York-law bonds have been in default since a US court last year blocked payments on them unless Argentina also made whole the litigant creditors.
The government is seeking to reduce past due interest and cut a deal that is acceptable to Congress, where the party of newly installed President Mauricio Macri is in a minority.
"It will be more complex than Italian negotiations," said Siobhan Morden, head of Latin America strategy at Nomura.
"But I don't think it will drag on. The country needs market access, and it is good time to seek approval from Congress while Macri still has political capital."
Unlike the Italian creditors, who will receive US$1.35bn in cash for their US$2.5bn claim, other holdouts have shown a willingness to receive payment in bonds.
This will bring its own set of risks, however, namely the threat of a deluge of bond supply that could knock secondary levels lower.
According to Bank of America Merrill Lynch, the government will need to issue US$15bn this year, including US$7bn in June when Congress is expected to sign off on any agreement.
This does not include the potential sale of sovereign debt from hedge funds that are expected to reduce their exposure to Argentine risk after taking profits from recent price gains.
"There is a US$25bn (supply) overhang that will take a year-and-a-half to clear out," a hedge fund investor told IFR last month.
Such concerns have put a spanner in the works for prospective Argentina issuers, and deal execution could prove difficult.
One possible solution is to involve an intermediary bank, which could monetize holdouts' legal gains and slowly re-sell the bonds into the market.
This is what Spanish oil company Repsol when it was paid compensation for the 2012 expropriation of its stake in YPF.
"It is a price risk for holdouts," said Morden. "If they dump (all their bonds) at the same time, it is their loss."
Bank of America, which has kept its overweight position on Argentine external debt, thinks the market should have little trouble absorbing the additional US$7bn in June.
"When Argentina paid US$5bn to Repsol in 2014, the market was able to take down the supply in one day," it said. (Reporting by Paul Kilby; Editing by Marc Carnegie)