NEW YORK, Nov 5 (IFR) - Holders of Argentina’s defaulted Par bonds are banding together to increase their leverage with the sovereign, using the threat of possible payment acceleration to solidify their position.
About a dozen funds have been in talks with Chicago law firm Kirkland & Ellis, sources told IFR, with an eye to gaining at least 50% control over a single bond series of Argentina’s outstandings.
At the 50% threshold, the bloc would be able to start and stop so-called acceleration, by which holders of the defaulted bonds could demand immediate repayment of principal and interest.
But many lawyers, analysts and investors say acceleration is a risky path in dealing with Argentina, which went into its second default in 13 years this summer amid a long-running legal battle.
The move would add to the uncertainty around Argentina’s fight with holdout creditors led by Elliott Management, who are owed US$1.33bn plus interest, according to a US court ruling.
Argentina’s refusal to make these creditors whole at the same time it pays holders of its previously restructured bonds pushed the sovereign into the second default in July.
“Whoever accelerates is buying themselves the same problem that Elliott has,” said a holder of the Par bonds who did not take part in the bloc discussions.
“You can stay where you are, and no one loses any rights for not accelerating.”
Sources say the investors have yet to create any formal committee or decide that acceleration is the right path to take.
Yet it could make sense for holders of the Pars, which are trading at roughly half face value compared to mid to high 80s on the Discounts, the first bonds defaulted on in July.
Because of that differential, the Par holders face a smaller price drop in the event of a sell-off - and a bigger payout if acceleration should prove to be successful.
“We are aware that there are some guys out there who are trying to put together a group of sufficient size to accelerate and de-accelerate,” said a second Par holder.
According to Argentina’s bond contracts, an acceleration of payments requires the backing of investors holding at least 25% of the nominal amount outstanding on any particular bond series.
A higher threshold of 50% is required to reverse the process - or de-accelerate - once the default has been cured, and all missed coupons and accrued interest have been paid.
“The only reason [Par holders] have a seat at the table is that they threaten to accelerate,” said an investor holding Argentina’s restructured bonds.
However, the threat of acceleration arguably raises the stakes, and could leave investors facing a costly and lengthy litigation, one moreover that still has no guaranteed outcome.
“We think that the cost-benefit of acceleration is unfavorable to investors,” Morgan Stanley analyst Robert Tancsa wrote in a note to clients this week.
“The upside compared to a resolution of the holdout situation is highly questionable, while it increases the risks around a positive outcome for the holdout problem.”
A number of investors clearly still agree, opting to remain on the sidelines of the latest skirmish - at least for now.
The hope is that Argentina will eventually settle with the holdouts early next year, when the so-called RUFO clause - which prevents Argentina from offering better terms than those of its 2005 and 2010 restructurings - expires.
Failing that, a deal could be made in 2016, when a new government will come to power in the South American nation.
“My sense is that they are mostly trying to turn up the heat on Argentina to settle with the holdouts, because they are looking at a government that is not making any progress,” a lawyer close to the situation but not involved with the talks said about the pro-acceleration bondholders.
“They are playing with fire. Once they accelerate, I am not confident that they will be able to control the process.”
Reporting by Davide Scigliuzzo; Editing by Paul Kilby, Marc Carnegie