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The market in Argentina external
bonds has been recovering over the past two weeks (first
chart).
During the first week
of recovery Argentine bonds only rode on the coat-tails of the
global bid for EM. Thus, they performed in line with the market
(second chart). More recently, Argentine bonds began performing
better—not just on an absolute, but also on a relative,
basis.
This morning, amid a
continued bid for EM assets, two pieces of news related to
Argentina have drawn attention and may have helped to further
support Argentine assets. The two headlines were:
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Interest by
holdouts in accepting a 'cram down'. First, a local press article
suggested that holdout creditors were displaying interested in a
reopening of the debt restructuring on the terms of the 2010 offer
which Argentina reiterated in its recent filing to the
Court.
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Interest by
Supreme Court in Argentina litigation. Second, a Bloomberg headline
pointed out that the Supreme Court was requesting the solicitor
general to file briefs in Argentina vs NML (12-842) expressing the
view of the US government.
On both subjects some
additional background is warranted to provide an adequate
perspective:
Negotiations:
different investors
First, with respect to
negotiations between holdouts and Argentina the local press article
is suggesting that lawyers of creditors had contacted Argentina's
lawyers to request information on its proposal to re-open its offer
on the terms of the 2010 restructuring. The creditors are
identified as a group of retail investors.
It would be positive
for Argentina to be able to swap its defaulted debt for new bonds
and in doing so to show Courts that it is not stuck in a position
of permanent debt repudiation. However, the news does NOT involve
the key investment funds spear heading the litigating against
Argentina on 'pari passu' case. It is presumed that retail
investors hold between $2-3 billion of over $11 billion in
defaulted claims.
In other words,
'negotiations'—better characterized as inquires—do not involve the
'big fish'
While the inquiries of
one group of creditors (retail) willing to be 'crammed down' may
spark hope that others (litigating funds) follow suit, we do not
think this will occur. Indeed, we continue to expect that the
litigating funds involved in 'pari passu' case communicate their
rejection of Argentina's proposal to the Appeals Court.
Furthermore, we do not expect that Judges pending decision in the
'pari passu' case to be swayed by what one group of creditors might
be voluntarily willing to accept.
Supreme Court:
different litigation
The case which Supreme
Court inquiring into is NOT the 'pari passu' case. The case under
consideration involves a requests by holdout creditors to discover
financial flows of the Argentine government managed by Banco Nacion
and Bank of America. Argentina is not willing to abide by the
adverse Appeals Court ruling of August 20, 2012 and had filed a
writ for certiorari on January 7, 2013.
The case at hand may
well receive Supreme Court consideration because it involves a
conflict between a ruling against Argentina as held by the Second
Circuit (which allows post-judgment discovery to enforce a judgment
against a foreign state on all its assets, regardless of their
location or use) and others held by the Seventh, Fifth, and Ninth
Circuits (in which post-judgment discovery against a sovereign is
limited to assets located in the United States that are potentially
subject to execution under the FSIA).
It is not clear that
the Supreme Court's interest to receive an opinion from the US
government in a case (discovery of assets) involving a sovereign
before deciding to review it or reject it makes it any more
probable for the Supreme Court to accept a different case ('pari
passu') involving the same sovereign (if and when the sovereign
files the petition). In the 'pari passu' case there is no precedent
and thus, no potential conflict between Circuit
Courts.
Evidently, if Argentina
is confronted with a potential negative 'pari passu' ruling from
the Appeals Court, it will seek to obtain an extension of stays
while petitioning for Supreme Court review. In our table of Court
ruling outcomes (see below) we characterize this one as 'negative
with a silver lining (delayed resolution)'. But Argentina has yet
to file this petition.
Not inclined to chase
the price rebound
The rebound in
Argentine bonds raises many questions among investors: Are markets
expecting judges to get "cold feet" and desist from ruling against
Argentina? Or might technical default be avoided in a surprise
negotiation with holdouts? Alternatively, would it be feasible for
Argentina re-route payments off-shore and exit technical
default?
We have sought to address these questions already (see
Argentina: Fade the price rebound following the Court’s ‘RSVP
order’ to holdouts,
Apr 8). Our answers to them were (and remain): 'very unlikely,
relying on Court hearings and rulings'; 'not in Kirchner's
lifetime'; and 'legally/mechanically, its not simple'
We acknowledged that a
new cross-over bid for distress credit has provided a genuine—near
term—support to Argentine bond prices—particularly for external law
EUR bonds which offered cheapness (vs. USD bonds) and optionality
(if carved out of the injunctions). We can also justify an
Argentine resident bid for USD domestic law bonds. After all, they
are suffering a rising inflation tax on peso holdings amid capital
controls (see
Seigniorage: Controls allowing Argentina to milk a cash
cow, Apr 12) and
the coupon payments on those USD bonds are not directly affected by
foreign Court litigation and short duration.
But we do not read into
the bond price rebound any potential improvements to the chances
that Argentina avoids a negative Appeals Court ruling nor that
(willingness aside) its capacity to re-route payments on external
law bonds can be taken for granted.
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