Sunday, January 18, 2015

Traders counting on 2015 bond payments

Central Bank reserves have been boosted by a swap with China, helping reassure markets of bond repayments.

Prices on leading emerging market instruments of 2014 hint at positive outlook for this year

NEW YORK — Markets are shrugging off looming amortisation spikes in Argentina this year and banking on the current government to honour its international debt obligations in 2015.

The buyside is currently pricing in that best-case scenario for Argentina, which despite last year’s ongoing battles with holdout bond creditors, was one of the best performers in the emerging markets universe in 2014.

Last year the Argentine sovereign component of the EMBI Global index tightened by 89 basis points (bp), versus 45bp for the overall index. It was a similar story for the country’s corporates, which rallied by 143bp compared with a 67bp widening on the corporate emerging market index ­ the CEMBI.

And accounts expect more upside in 2015, in which they see more “market-friendly” candidates winning the presidency.

“We have an election this year. It is the last time the Kirchners can be in government and the three candidates are more market-friendly,” said a Buenos Aires-based trader.

“Bonds are not expensive and if you compare them with the rest of the region they are cheap.”

Such performance has partly been spurred by support from US distressed players in search of opportunities outside their home market.

Taking a long-term view, accounts have broadly been betting that a change in government will result in a quick resolution to the holdout crisis, renewed access to the international capital markets and a fast economic turnaround.

“In our view the situation with the holdouts will be resolved between now and reasonably shortly after the election of the new government,” said Paolo Valle, senior portfolio manager at Manulife Asset Management, whichmanages some US$4 billion in emerging market assets.

‘There are very few investments today that can offer the potential returns created by the normalisation of the issue with holdouts.”

Presidential candidates have been averse to expressing a clear stand on the matter but Renewal Front leader Sergio Massa’s economic advisers think there is a clear way for the government to solve the financial blockade it is suffering at the hands of US District Judge Thomas Griesa’s New York courts: offer to hand over more money to the “vulture” funds.

“We have to look for a middle ground in order to fulfill the conditions of Griesa’s ruling,” former Central Bank chief Aldo Pignanelli told the Herald earlier this month. “Trying to make them accept the amount the government is offering is a lost cause because, regretably, the country already lost at the courts.”

Optimistic outlook

Markets have barely flinched on negative headlines and uncertainty generated Griesa’s rulings.

A negotiated resolve the country’s decade-long dispute with holdout creditors led by Elliott Management also seems ever more distant — at least under the current administration.

Despite the expiration of the so-called RUFO clause, which the government said had prevented it from negotiating with the holdout creditors, both sides remain too far apart to meet in the middle, analysts say.

The Rights Upon Future Offers (RUFO) clause expired on January 1.

For now the market is not pricing in short-term payments risks, as can be seen by the price action on the local law 7% Bodens due October 3 2015, which have been trading just above par.

“I have only seen that optimism on the Boden 2015s,” said a US-based trader. “It is a good rate, and the market is confident about payment.”

That US$6 billion, however, is just under half of the approximately US$13 billion owed in debt servicing costs this year, including Paris Club debt and coupon payments from the recently issued Bonar 2024s, said Siobhan Morden, head of Latin America strategy at Jefferies.

Confidence in the country’s payment abilities has been raised now that reserves have stabilized, partly thanks to currency swaps from China, but markets have largely been focusing on the approximately US$31 billion in gross reserves, not all of which can be used for debt servicing, Morden points out.

The fourth installment of the reserve swap with China was executed this week, sending the total disbursements to over US$ 3 billion of the US$11 billion agreement with Beijing.

Herald staff with Reuters