(This story originally appeared on IFRe.com, a Thomson Reuters publication)
* Technical default a real risk
* Delays could spur new issuance
* Open door to negotiated settlement
By Davide Scigliuzzo and Joan Magee
NEW YORK, May 30 (IFR) - The countdown to a US Supreme Court decision on Argentina’s petition for a reversal of an earlier ruling favouring holdout creditors has begun. Deliberations start on June 12.
Many investors are betting that the case will continue to be bogged down in the courts. That, paradoxically, could open the floodgates for more issuance from the country and a further rally in Argentina assets, as a delay would give the sovereign breathing space and provide room for issuers to come to market.
But the risk that the court could reject the country’s appeal outright - forcing the sovereign into a technical default - remains very real.
“If there are more delays, the market could go up big time. But if they are forced into a technical default, bonds could drop 15 points,” said a New York based trader.
In the event that a technical default is declared, it clearly will not be just sovereign paper that is hit. “I think Argentine risk in general will be re-priced,” said Marco Santamaria, a portfolio manager at AllianceBernstein. “Any disruptions on New York-law bonds are bound to reflect negatively on Argentine assets.”
The Court can either reject Argentina’s petition outright, ask for the opinion of the US government through the Solicitor General or agree to consider Argentina’s case.
Either of the last two options would delay a final pronouncement of the Supreme Court until June of next year.
“The market is pricing in that the case will go to the Solicitor General,” said a trader. “With that info, we may see plenty of coming to market.”
But the first choice would have an immediate impact on the market, forcing the sovereign to decide how to respond to a lower court’s ruling (that it should pay holdouts in full - US$1.33bn - when it pays other bondholders who accepted its 2005 and 2010 exchange offers) in relatively short order.
At that point, the country could either try to reach an agreement with holdout NML Capital, which is owned by Paul Singer’s vulture fund Elliott - but leave itself exposed to claims from other creditors clambering for payment - or push its New York-law bond into a technical default.
The government certainly appears open to a negotiated settlement with holdouts, with Reuters quoting Cabinet Chief Jorge Capitanich on Thursday as saying the country had “one last instance” to clear up the restructuring, “be it by judicial path or by the path of voluntary agreement”.
Talk of possible discussions with holdouts has long been in circulation. The most high-profile plan came from fund Gramercy, which proposed that existing restructured bondholders funnel some of their payment to litigant investors. The latter subsequently roundly rejected such plans.
So far, the sovereign has yet to approach holdout investors who say they are open to discussions. “We are open to a variety of ways of reaching a resolution,” said a source from a holdout firm.
He took last week’s statements as a “hint” of progress, saying that Argentina “hopefully recognised that resolving its international debts - whether with public or private creditors - is a positive political move for Argentina’s leaders and a positive economic move for the nation”.
Such negotiations would be made all the more complicated, however, by the so-called RUFO clause in the restructured bonds. This says that if the sovereign offers improved terms to the holdouts it must do the same with investors holding the restructured bonds.
Some observers believe that the government hopes to muddle through in the courts until December 31, when the clause expires.
“If the Supreme Court asks the Solicitor General’s opinion, it will take some time and the next thing you know you are in 2015 and the RUFO clause doesn’t apply any more,” said an account invested in Argentina.
Should the court reject the country’s petition, Argentina might also avoid violating the RUFO clause by arguing that a change in terms would not be voluntary.
Issuers getting ready to come to market on the assumption that a decision will be kicked into the long grass are led by the Province of Buenos Aires. It is preparing to issue a bond of up to US$500m even before the June 12 deliberations begin.
“I think you will see a fair bit of new issuance out of this space,” said a syndicate banker covering the region. “Yes, people are keeping an eye on the [Supreme Court decision], but there seems to be a strong bid for Argentina.”
Some emerging market and high-yield investors accustomed to Argentina’s risks are scouting for opportunities. “[The issuers] are based where they are based, but investors are looking into the credits and the fundamentals,” said the banker.
Among borrowers hoping to tap into that appetite are those facing redemptions over the next couple of years and need to smooth out amortisation humps.
The City of Buenos Aires faces US$518m worth of redemptions over the next year, while among corporates Telecom Argentina has 163m to repay in October and Cablevision has an 11% US$170m step-up note issue falling due a year later.
Link to Province of Buenos Aires to add towards the end of the story: [IDn:L6N0OF3AP] (Reporting by Davide Scigliuzzo and Joan Magee; Editing by Paul Kilby and Matthew Davies)