Thursday, July 9, 2015

‘Acceleration clause won’t hit Argentine debt’

Jeffrey Altman, head of the Owl Creek fund which leads efforts to accelerate Argentine debt, is pictured in a file photo.

Majority of Argentine bondholders likely to oppose strategy, says global investment bank

Global investment banking firm Jefferies says Argentina is unlikely to suffer from the triggering of the feared “acceleration” clause, which could force the country into paying many of its bond series as a lump sum.

For that clause to be activated, a percentage of bondholders need to join forces in order to demand that course of action, but “the majority of bondholders are likely non-litigant and favour repayment,” Jefferies said in a note to investors.

The acceleration clause means that 25 percent of holders of a series of bonds can demand immediate and due payment on principal and interest in case that series has been defaulted.

According to the International Swaps and Derivatives Association (ISDA), Argentina entered into “selective default” as of July 30, 2014, when the month-long grace period to complete the restructured debt payments blocked by New York’s courts expired.

Jefferies says that even if a group of bondholders teams up to obtain the necessary 25 percent of bonds of a series, the government would still have the option of countering that by grouping 50 percent of other holders opposeing the move in order to stop the attempt.

That threshold might seem high, the investment firm says, but it’s not unreachable when considering that only a minority of bondholders favour the acceleration strategy.

So far, acceleration attempts have been led by the minority of bondholders in Owl Creek Asset Management, a hedge fund that since mid 2014 has been approaching other funds in order to meet the required 25 percent.

Last year, Owl Creek tried to use law firm Kirkland & Ellis in the search for Par 2038 bondholders, but firms such as Bienvillle rejected their approach. Owl Creek took the initiative again last week, announcing it was joining forces with law firm Jones Day in order to hold talks with other investors.

Although Owl Creek’s move raises worries for Argentina, Jefferies thinks future governments will have this potential risk in mind in December 2015, and that they will move to put an end to the “vulture” conflict relatively soon. If the conflict in New York courts is settled, the acceleration clause would no longer be a risk.

“The incoming administration will need to start with goodwill from the markets to minimize the adjustment process (they won’t want a freefall on the foreign exchange rate) against still high uncertainty on the details of an economic adjustment plan,” Jefferies says.

In their view, the future president would prefer to obtain financing from abroad over making deep cuts to the budget, and that would be an additional incenctive for the new administration to look for a settlement.

Different approaches

Jefferies thinks that policy changes next year could be radical or moderate. In its view, big pro-market changes are still possible, as a defeat for the government is not out of the question, but markets are being over-cautious lately.

“The markets have become too bearish about the risk of status quo. It is important to remember that this remains still a tight race with an average technical tie across the polls if we measure the ruling party versus the opposition,” their note said.

Still, the note focuses more on Victory Front’s Daniel Scioli as a potential future president rather than on the opposition candidate Mauricio Macri.

But it says Scioli could still implement some reforms. “If technocrats such as (Miguel) Bein or (Silvina) Batakis remain as his economic advisors, then this suggests a moderate policy transition,” Jefferies said.

As an example, it said a future Scioli administration could try to slash the amount of subsidies in order to reduce the fiscal deficit, but would do it progressively, “focusing more on a re-distribution dependent upon income strata to minimize the social costs of the adjustment.”

—Herald staff