The relative calm in Argentina’s debt markets since its default in July may be shattered as the risk increases that holders of $14 billion in bonds will ask for their money back immediately, according to Bank of America Corp.
After a grace period expires next week, investors in Argentina’s so-called Par bonds can demand full repayment of principal originally due in 2038 as well as interest, according to the debt contracts. The outperformance of the Pars, which have returned 1.2 percent in the past three months versus losses of 5.5 percent for notes due 2033, is a signal to Bank of America that more bondholders are considering acceleration.
While Argentina’s unwillingness to negotiate with unpaid creditors from its 2001 default pushed the country into its current predicament, bondholders have thus far refrained from asserting their own claims and escalating the crisis. That may now change. Because the Pars are Argentina’s lowest-priced bonds and trade at 53.29 cents on the dollar, speculators such as distressed debt funds have an incentive to organize and try to force the nation into repaying in full.
“The par bonds have outperformed because distressed hedge funds have been the primary buyers, some of whom see the acceleration option as having some value,” Jane Brauer, a New York-based strategist at Bank of America, said by phone.
While Argentina deposited $161 million to pay interest on the dollar-denominated Pars last month, a U.S. court order prevents bondholders from getting their money until the government resolves its more-than-decade-old unpaid debts with creditors who refused to participate in 2005 and 2010 restructurings.
That ruling caused the nation to default for the second time in 13 years in July. The interest payments, which Argentina says it has been paying all along, are sitting in a state-run bank inBuenos Aires.
Jesica Rey, an economy ministry spokeswoman, didn’t respond to messages seeking comment on the risk of acceleration.
President Cristina Fernandez de Kirchner hasn’t said whether she’d be willing to negotiate with the holdouts in January when a key bond clause expires.
The government cited the so-called Rufo clause as a reason why they can’t pay holdouts led by billionaire hedge-fund manager Paul Singer more than the 30 cents on the dollar that restructured bondholders received.
Cross-default provisions that govern the Pars have been in place since Argentina’s so-called Discount bonds due 2033 went unpaid in July. After Oct. 30, the Pars will also be in default in their own right, which some investors may be waiting for, according to Brauer. She also said there was “extensive” interest in the risk of acceleration among investors at a Bank of America conference held during the International Monetary Fund’s meetings in Washington this month.
“Investors may accelerate prematurely and derail potential negotiations before they start,” Brauer said.
Argentina’s peso was little changed today at 8.4858 per dollar as of 11:55 a.m. in New York.
As South America’s second-biggest economy slows and reserves hover close to eight-year lows, the government risks losing its ability to pay anybody and having to renegotiate all of its debt obligations.
The Par bonds are the cheapest of Argentina’s overseas bonds because they pay the lowestinterest rate. The dollar notes pay 2.5 percent annually, while the euro-denominated bonds pay 2.26 percent. Yen-denominated pars, with only about $205 million outstanding, pay annual interest of 0.45 percent.
Tom Mullen, a partner at Westport, Connecticut-based hedge fund TWM Capital LP, says it’s too costly and logistically challenging for investors to try to seek full repayment before January, when the Rufo clause expires and it will be possible for Fernandez to settle with the holdouts and resume bond payments.
“From a practical standpoint, trying to get bondholders organized in any of these bonds -- and we’ve tried it before -- is very, very time consuming,” Mullen, who oversees about $200 million, said by telephone from La Jolla, California.
Alejo Czerwonko, a New York-based strategist at UBS Wealth Management’s chief investment office, says it doesn’t make sense for his firm to accelerate their par bond holdings.
“It is highly unclear what terms those who accelerate will be offered, and it makes exiting this holdout mess even more complicated,” he said.
With about $5.4 billion outstanding, the dollar-denominated Pars require holders of 25 percent, or $1.4 billion, to demand immediate payment of principal and past due interest. It will take holders of $2.2 billion of bonds to trigger an acceleration of $8.9 billion of euro-denominated Par securities, which cost 48.4 cents on the dollar.
“It would not be a massive surprise” for holders to opt for acceleration, Fernando Losada, a Latin America economist at AllianceBernstein LP, said by e-mail. He declined to comment on the firm’s holdings of Pars.