(Changes throughout, adds comments from Pollack)
By Davide Scigliuzzo and Paul Kilby
NEW YORK, Feb 29 (IFR) - An historic agreement between Argentina and it principal holdout investors did little to move the market on Monday as investors readied themselves for a jumbo bond offering from the South American country.
Restructured bonds were trading essentially flat after a court-appointed mediator announced an agreement in principle between Argentina and a group of its most litigant bondholders to settle a long-running dispute over defaulted bonds.
The deal paves the way for Argentina to end a near 15-year isolation from the international capital markets after its 2001 default, with the sovereign expected to raise up to US$15bn as early as March.
“It doesn’t have significant market moving consequences, but it is a day of symbolic importance,” said Alejo Czerwonko, emerging markets economist in the chief investment office at UBS Wealth Management.
“These are clearly the toughest guys out there and they have reached an agreement with Argentina after litigating over a decade.”
Argentina’s New York-law 2033 Discount bonds, were trading flat at 117.50-118.50 late Monday morning. That’s below their peak of around 120 reached earlier this month when US Judge Thomas Griesa signaled that he would be ready to lift a pari passu injunction preventing payment on the restructured bonds.
“Everybody knew it was a matter of time,” said Patrick Esteruelas, a sovereign analyst at Emso Asset Management.
“You have already seen some lightening of positions and the exchange bonds in particular are going to face some upside price resistance.”
Despite a broader bout of risk aversion, Argentina bonds have outperformed EM indices over the last month as markets anticipated a high likelihood that the South American country’s holdout saga was nearing an end.
JP Morgan’s EMBI Global Diversified index returned 1.66% in February compared to 5.48% for Argentina, which still carries default ratings from S&P and Fitch.
“The market has compressed as a result of (a potential holdout) settlement and is pricing Argentina at a level much higher than its rating,” said Michael Roche, an EM fixed-income analyst at the Seaport Group.
“I reckon the credit will settle around BB- or B+, but we don’t expect much outperformance going forward.”
Gabriel Torres, a senior credit officer at Moody‘s, which rates the sovereign Caa2, said on Monday that Argentina “could commence its transition out of the Caa range,” now that it has cut a deal with creditors.
Argentina agreed on Monday to pay Paul Singer’s Elliott Management and other funds who sued Argentina alongside it a total of around US$4.653bn to settle all claims worldwide.
Of that amount, about US$235m will go toward claims made outside the US Southern District Court of New York and for legal fees, court-appointed mediator Daniel Pollack told journalists at a press conference in New York on Monday.
As with previous agreements reached between Argentina and holdout creditors who refused to participate in its 2005 and 2010 debt restructurings, the deal requires the South American country to repeal two laws that bar those settlements.
President Marucio Mauricio Macri, who was elected last year on a pro-business platform, is expected to make his case as soon as Tuesday when he speaks before Congress.
Lawmakers are widely expected to repeal such restrictions, leaving Argentina open to accessing the bond markets as it seeks to pay holdouts and plug the country’s large fiscal gap.
“The judge will watch very carefully to see if Congress lifts the lock law and the sovereign payment law,” said Pollack.
“He will then determine whether he will vacate the injunction. There isn’t going to be a situation where the injunction is lifted and the holdouts are not paid.”
Argentina agreed to pay funds managed by Elliott Management, Aurelius Capital, Davidson Kempner and Bracebridge Capital 75% of their full judgments including principal and interest plus certain legal fees.
If Argentina fails to pay those funds by April 14, the agreement can be terminated, said Pollack.
Monday’s deal is seen providing Elliot and Aurelius, the principal drivers behind the sovereign’s 12-year old battle with holdouts, better terms than the agreement they refused to accept in early February.
Monday’s agreement in principal “goes beyond” the offer announced on February 5, said Pollack in answer to questions about whether Elliott would be paid more.
Aurelius argued earlier this month that the original proposal left it with less favorable terms than fellow holdout Dart Management, which along with Montreaux Equity Partners opted to accept Argentina’s first proposal.
Under the prior offer, the government agreed to pay holders of defaulted bonds without a pari passu injunction 150% of their principal claim.
Accounts covered by the pari passu injunction were offered 72.5% of their total claim, or 72.5% of the amount they have been awarded in US courts.
Combined with previous settlement agreements, bondholders representing 85% of claims under the pari passu and me too injunctions have now reached an agreement with Argentina.
“There are few more holdouts but having Elliott on board paves the remaining holdouts to fall in line,” said Sean Newman, a senior portfolio manager at Invesco.
Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Jack Doran