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Argentina CDS questioned after default

Jul 31, 2014

Decision on credit default swaps due on Friday after sovereign defaulted on Wednesday having failed to reach agreement with holdout creditors

CDS on Argentina could be triggered on Friday when the International Swaps and Derivatives Association, ISDA, will meet to decide on the subject.

UBS asked ISDA on Thursday morning to look at the issue, after a series of last-minute negotiations between Argentina and holdout creditors ended without an agreement on Wednesday.

Parallel discussions between Argentina’s banking association and the holdouts in search of a work-around solution also fell through, leaving the path ahead for the sovereign unclear.

CDS referencing Argentina has traded erratically this week, tightening from 40 points upfront on Tuesday to 30 on Wednesday, only to widen back to 39 the same day, according to data from Markit. It was trading at 30 on Thursday morning.

Bonds appeared resilient on Thursday morning after an impressive rally in anticipation of a deal on Wednesday.

"Surprisingly, the reaction was muted," said Walter Molano, head of research at BCP Securities. "Bond prices dropped 10 points at the open in London. However, they clawed back some of the lost ground as the New York markets began to open. Institutional buyers appeared, wanting to take advantage of the fact that many of the sovereign bonds are trading flat. They will recoup the lost coupon as soon as the matter is settled."

Ratings cut

Standard & Poor’s was the first to label the sovereign in default, cutting its rating on Argentina to Selective Default, from CCC-, on Wednesday afternoon as the deadline passed for the government to make a $539m payment on its 2033 bond. The country is not allowed to service its restructured bonds without reaching a deal with holdout creditors.

Argentina’s banking association, Adeba, had been in discussions, led by Sebastian Palla, Banco Macro’s head of investment banking, with holdouts. Despite persistent rumors in Argentine press on Wednesday night that a deal was imminent, LatinFinance understands the talks had broken down and the banking delegation was set to return to Buenos Aires.

Adeba was reported to have offered a work-around solution that would have seen it buying some Argentine debt and holding it in escrow.

"There have been no official details from the mediator on the context of the discussion but the local press posits that the Argentina banking association has offered to post $250m to $300m in funds for an escrow payment (2010 debt reoffer terms to not violate RUFO) or alternatively has offered to buy the holdout bonds," Jefferies wrote in a research note on Wednesday morning.

The developments led to a tumultuous day in markets on Wednesday, with the sovereign’s instruments rallying sharply as rumors circulated that a deal — either between the holdouts and either the banks or the sovereign — was imminent.

"What happened this morning and was in all the press was something positive, good expectations of an agreement, equities went up like crazy, bond were up like crazy, and we were all expecting a short term default maybe," said Alberto Bernal, head of macroeconomic research at Bulltick Capital said on Wednesday.

Blame game

Kicillof refused to accept the country had defaulted, reiterating Wednesday evening in a press conference in New York that the country had transferred the funds to pay the 2033 bond. He blamed Judge Thomas Griesa — who had blocked US banks from transferring the payment to bondholders — for the sovereign’s predicament.

The bondholders put the blame on the sovereign, however: "During this process, the Special Master proposed numerous creative solutions, many of which were acceptable to us," an NML spokesman said on Thursday morning. "Argentina refused to seriously consider any of them, and instead chose to default."

Talks with the holdouts had sought to get them to agree to a stay on a court order to pay all creditors at the same time. Kicillof said the sovereign could only pay the holdouts what they paid in earlier restructurings. Paying more, as the holdouts demanded, would open claims for equal treatment from restructured bondholders under a "RUFO" clause in restructuring documents that expires in December.

Kicillof told reporters that no Argentine bankers were at Wednesday’s meetings: "It wouldn’t surprise me that there’s a solution between private parties," Kicillof said on Wednesday, but he added that he had heard about such potential solutions from newspapers.

In a longer than typical statement, mediator Daniel Pollack said he expected meetings to continue between the holdouts and the sovereign: "I will continue to be available to the parties to aid them in reaching a resolution which they must reach in the interests of all concerned. Default cannot be allowed to lapse into a permanent condition or the Republic of Argentina and the bondholders, both exchange and holdouts, will suffer increasingly grievous harm, and the ordinary Argentine citizen will be the real and ultimate victim." LF



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“The crisis has been a setback for reserve diversification."

Jan Dehn, Ashmore Investment Management