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Argentine debt swap plan draws warnings

Aug 20, 2014

President Cristina Fernández announces a work-around to US court orders prohibiting payment on restructured bonds

     
     
  Argentine President Cristina Fernández 
announces debt swap plan on Tuesday
Photo: Casa Rosada
 
The Argentine government’s offer to swap New York-law bonds into local law ones has drawn caution from analysts about the feasibility of such a move.

President Cristina Fernández announced the plan late Tuesday night, saying she would ask congress to vote on the idea. In addition to swapping the bonds to Argentine law, the government is proposing to use Banco de la Nación as trustee, replacing Bank of New York Mellon.

If successful, the deal would allow the sovereign to exit default by paying a coupon due on restructured debt on July 30. The payment has been blocked by US courts until Argentina and holdout creditors reach a deal.

But analysts were cautious about the feasibility of Tuesday’s proposal, and the long-term result.

Some 85% of bondholders would need to agree to a change in the bond trustee, said analysts at BancTrust. Additionally, the swap could put Argentina in contempt of court "with unambiguously negative implications, yet not entirely known at this point", BancTrust said.

"We expect NY-law paper to suffer not less than 10 points today, moving fast forward to a full default scenario that may force another debt restructuring in the future, possibly creating a new generation of holdouts."

Real money accounts and dedicated money funds may also have trouble holding local law debt, BancTrust noted.

Analysts at Jefferies echoed the points, saying some investors hoping to hold on through a short period of default may be pushed by their investment mandates to sell. Only a "small subset" of investors might participate, the analysts said:

"The execution risk should be high and initial participation quite low as real money investors are discouraged from participating at risk of violating the pari passu judgment," Jefferies said. "The workaround proposal has been discussed among market participants for over a year and the feedback from investors has been extremely cautious to this strategy."

Holdout question

Analysts were also cautious about the longer-term implications. If the deal proceeds, it could push back a resolution with holdout creditors that some had hoped might come next year, said Capital Economics: "It was notable that Ms. Fernández stated last night that she had little time left in office (elections are due in October next year) and that 'this is not for this government but for the next one’. As such, a deal with holdouts seems unlikely until 2016 at the earliest."

Others saw the situation more positively. Bulltick Research argued that the proposal did not close the door to a deal with holdout creditors.

"In our view, the introduction of this Plan B, one that allows for the holders of NY-law debt to ask for their coupon payment in Buenos Aires without having to tender their NY-law governed assets, does leave some room open for a future negotiated settlement with the holdout community to take place, in that manner maintaining some hope that Argentina may be able to come back to international voluntary markets at some point in the future." LF

See also:

Aurelius says private talks over Argentina debt have failed

Default implications come into focus



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