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October 24, 2014
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CNV to investigate holdouts speculation

The International Swaps and Derivatives Association is formed by several banks such as Citibank and funds like Elliott Management
By Fermín Koop
Herald Staff

International Swaps and Derivatives Association declares country in default

The Economy Ministry asked yesterday the national securities watchdog (CNV) to investigate whether litigation in the United States against the nation by holdouts was merely the “façade of speculative manoeuvres in favour of vulture funds” to earn profit on defaulted bonds they bought on the cheap as well as on credit default swaps (CDS).

The Argentine securities watchdog will ask its US counterpart, the Security and Exchange Commission (SEC), for “precise information about the transactions of these CDS to investigate if the vulture funds earned a huge benefit from not reaching an agreement, either directly or via third parties”.

The request came at the same day the International Swaps and Derivatives Association (ISDA) decided to declare Argentina in default, which would trigger payments worth up to US$1 billion CDS. ISDA’s determinations committee voted unanimously 15-0 that a “failure to pay” event occurred on July 30, when Argentina missed a coupon payment on some restructured foreign-law bonds.

As CDS contracts are traded between private parties, no immediate monetary consequence is seen for the country. Nevertheless, the repercussions might not take long to spring up, as the ruling will also allow most Argentine bondholders to demand the application of their credits’ acceleration clauses.

The ISDA triggered more than 2,600 contracts, which insured US$1 billion up to July 25, according to the Depository Trust & Clearing Corp. The swaps pay out the buyer the face value in exchange for the underlying securities or the equivalent cash when debtors breach their contracts.

ISDA’s committe met after the Swiss bank UBS asked them to consider whether a “failure to pay” credit event has occurred, citing a missed deadline to deliver interest payments to exchange bondholders. Argentina has upheld its stance that it won’t sign off on any default, maintaining its contractual obligation was fulfilled in having made a US$539 million payment.

The ISDA committee, which will now hold an auction to settle the outstanding CDS transactions, is ironically formed by 15 members including banks such as JP Morgan and Citibank, who were reported to be negotiating to buy out the holdouts’ debt, and holdout funds such as Elliott Managment.

Directed by billionaire Paul Singer and worth US$24.8 billion, Elliot Managment was reported to have purchased on the last few weeks CDS in order to collect money after the ISDA’s decision, which would explain its refusal to ask Judge Griesa for a new stay. Nevertheless, sources close to the holdouts told the Herald yesterday that the rumours weren’t true and assured Elliott doesn’t own any CDS. At the same time, Singer denied owning CDS in a US court last year.

“It has been rumoured that Elliot purchased CDS in order to obtain a profit from the default. That would explain its refusal to reach an agreement,” Ignacio Frechero, debt expert and researcher at the CEIPIL international relations think tank, told the Herald. “Now Elliott is thinking about the future. They prefer to strike a deal with the government instead of with the banks to show it was able to beat the government.”

Citibank and JP Morgan, part of ISDA’s committee, were reported yesterday to be moving forward together with HSBC in negotiating with the holdouts to buy out their defaulted debt. Ámbito.com said only part of the debt would be purchased, instead of buying the entire US$1.65 billion as the Argentine private banks association (Adeba) wanted to do.

This would lead to holdouts asking Griesa for a new stay that would remove the country from the default declaration issued by ISDA and credit agencies. Following Standard and Poor’s and Fitch, Moody’s, changed the country’s credit scenario to “negative,” saying that the domestic economy will be harmed after the 30-day grace period to pay the holdouts ended without a deal.

“ISDA’s decision doesn’t have any legal implications for Argentina, it only has an effect on those who owned credit debt swaps,” Santiago Soler, lawyer specialized on financial law and a former adviser with the Central Bank presidency, told the Herald. “I wouldn’t be surprised if Elliott purchased such credits before ISDA’s ruling in order to obtain a profit. That doesn’t seem unlikely.”

Path to acceleration

Economy Minister Axel Kicillof warned on Thursday that the country could bring more lawsuits to challenge the contention that it is in default. Bondholders who participated in the two prior restructurings of the 2001 default now have to decide whether or not to seek immediate full payment of principal and interest on their restructured debt, a process known as acceleration.

This process requires 25 percent of the bondholders on each of 16 bonds issued in the 2005 and 2010 restructurings to ask BNY Mellon for a formal decision on default. The bank has then 60 days to decide if it takes the case or not. If it does, the government would appeal, Kicillof anticipated.

@ferminkoop

 

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