Last updated: 14:22 / Monday, 4 August 2014
By Henderson Global Investors

Reflecting on Argentina’s “Default”

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Reflecting on Argentina’s “Default”
  • Argentina remains in defiant mood regarding its “technical default”
  • “In terms of ability to pay, from Argentina’s perspective it wants to avoid paying a lot more than it has to. In terms of willingness to pay, there is no love lost between the Argentinian government and the holdouts"
  • “This is largely a US-judicial driven situation and, frankly, has had little or limited impact on Argentinian assets in the long term"

Despite falling stock markets and a decline in the peso versus the dollar, Argentina remains in defiant mood regarding its “technical default”.

The stumbling point is the so-called ‘vulture’ funds (a group of US hedge funds), which had rejected a renewed offer from the government. The Argentinian government is refusing to offer more to placate these holdouts. Judge Thomas Griesa is insisting that Argentina must pay the holdouts in full at the same time as holders of its performing debt.

To understand the problem you need to go back a little in Argentina’s history. Having initially defaulted on its debt in 2001, the vast majority of bondholders – around 93% – agreed to a settlement in 2005 and 2010. However, a small group of holdouts refused to settle. A rights upon future offers (RUFO) clause, however, was written into the settlements in 2005 and 2010. Essentially, this clause means that if better terms are agreed with the holdouts then the same terms need to be given to those who had settled in 2005 and 2010, which would vastly increase the cost of any settlement.

The situation remains highly fluid and hinges on a complex legal and financial transaction. At the time of writing, there are plenty of headlines in the media, according to Henderson Global Investors. There is talk of a potential deal in which a consortium of banks would buy the bonds from the holdouts and then attempt a fresh negotiation with the Argentinian government, either in the near future or maybe after the expiry of the RUFO in December 2014.

The International Swaps & Derivatives Association (ISDA) is reported to rule on 1 August on whether the missed bond payments mean that credit default swaps (CDS) have been triggered on Argentina’s overseas securities. Also at stake is the issue of ‘cross-default’, where holders of Argentina’s foreign currency bonds might invoke a ‘cross-default clause’ in their bond holdings and demand immediate payment.

Steve Drew, Head of Emerging Market Credit at Henderson Global Investors comments: “In terms of ability to pay, from Argentina’s perspective it wants to avoid paying a lot more than it has to. The expiration of the RUFO clause in December 2014 offers a potential exit strategy as it would allow Argentina to negotiate better terms with the holdouts without triggering additional payouts to those bondholders who settled in 2005 and 2010.

“In terms of willingness to pay, there is no love lost between the Argentinian government and the holdouts, with the government staking a lot of political capital on not paying any more to what it sees as a collection of opportunists. A scenario that might allow both sides to save face is for the holdouts to sell their bonds, probably at a discount to existing prices, to a consortium of banks who would then negotiate with the Argentinian government. Such a scenario might occur as early as the first quarter of 2015, with the banks receiving a price higher than the 2010 settlement but lower than that demanded by the holdouts. In such a situation, Argentina could be welcomed back into the capital markets fold within 1-2 years as markets tend to be quite forgiving when there is an appetite for yield and a lack of similar opportunities. Of course, the situation is highly fluid and I expect we will learn more over the coming days and weeks.”

Christopher Palmer, Director of Emerging Markets Equities comments: “This is largely a US-judicial driven situation and, frankly, has had little or limited impact on Argentinian assets in the long term.

“We are looking through this to the elections next year, when we anticipate a more market-friendly government to be elected. In our view, this is the last gasp of the populist Kirchner government that has drawn its battle lines. We believe a solution will ultimately be worked out because the amount outstanding – even if holdouts were paid in full – is around $1.5 billion (provided the RUFO clause is not triggered), which is small relative to the size of the Argentinian economy.”

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