November 25, 2014
Debt ‘acceleration’ turns into issue while new swap splits opposition
The government’s plan to restructure its external debt to skirt a US ruling that prevented it paying its creditors boosts the risk of investors demanding the accelerated payment of their bond holdings.
The default that took place at the end of last month had already opened the country to the possibility of creditors declaring the principal value of their bonds and interest due immediately — a process known as acceleration.
An acceleration could leave Argentina facing claims of up to US$30 billion, more than the government holds in foreign reserves.
Economy Minister Axel Kicillof sought to minimize the scope of the plan, saying it amounted to “a change of venue, not jurisdiction.” Still, Kicillof said he did not know what the move would mean for the risk of an acceleration.
Wall Street had been split over the risk of an acceleration following the default, with some fund managers, including those holding Argentine debt, arguing it would only harden Argentina’s stance against the holdouts when there remained hope for a negotiated settlement.
But President Cristina Fernández de Kirchner’s announcement late on Tuesday that Argentina would push to make payments on its sovereign bonds via a state-controlled bank poured cold water on any lingering expectations of a deal that would allow the resumption of the debt service payments blocked by US District Judge Thomas Griesa.
“The clear strategy to not pay the holdouts and to not cure the default may trigger the acceleration of the bonds,” said analyst Siobhan Morden at Jefferies.
Argentina defaulted on part of its restructured debt after Griesa blocked a US$539 million coupon payment after ruling exchange bonds cannot be paid until holdouts are paid in full.
Those funds remain held up with the intermediary Bank of New York Mellon. Draft legislation set to be debated in the Argentine Congress next week seeks to remove the US bank as trustee, replacing it with Banco Nación to ensure future payments go through local banks.
The legislation that is going to Congress would allow the country to make US$200 million in interest payments scheduled for September 30 to bondholders who voluntarily accept the change, Kicillof said.
“It’s a way for us to continue meeting our commitments,” he said.
But Griesa has warned that changing the jurisdiction of payments would have “serious legal consequences,” specifically warning Argentina of contempt of court. Cabinet Chief Jorge Capitanich dismissed that possibility yesterday, saying that sovereign countries cannot be held in contempt.
Government officials, who have bristled at what they see as an attack on its sovereignty by the US courts, say Argentina is not really in default since it has attempted to make the interest payments but was barred from doing so.
“There is no default,” Kicillof said. “We are going to keep paying.”
One of the holdout creditors, Aurelius Capital Management LP, issued a statement blasting the new strategy as an “evasion plan” that is in violation of a court order upheld by the U.S. Supreme Court.
“Argentina’s leaders have literally chosen to be outlaws,” it said. “They have chronically flouted US court orders, lied to our courts, and proclaimed utter disdain for our courts.”
PAR bonds vulnerable
An acceleration occurs if investors holding at least 25 percent of the nominal amount of any single restructured bond series demand immediate payment.
Of all the bonds eligible for acceleration, one of the dollar-denominated Par series maturing in 2038 has been the focus of investor attention, with just US$95.3 million outstanding, Reuters reported last week.
“If prices start taking a serious hit from this, then (Par investors) could start considering an acceleration as a viable option,” said Hejrskov said, whose firm holds Argentine debt.
Other market players argue that an acceleration on one series will trigger a cascade effect.
One fund manager told Reuters on condition of anonymity that “once there has been (an acceleration) on one series, everyone else will follow.”
Fernández de Kirchner and Kicillof both took pains to emphasize bondholders would have the option of switching their debt held under foreign legislation to local law.
The proposal stopped short of what analysts had considered the nuclear option of a mandatory bond swap, but it may still carry legal risks.
“The government is aware many investors will not be willing to enter this kind of transaction,” said Alejo Costa, strategy chief at local investment bank Puente, referring to the push to bring foreign debt onshore. “I don’t think they expect a large participation rate.”
Costa said some investors might consider attempts to change the trustee and place of payment a violation of their debt contracts, prompting them to demand accelerated claims.
Asked how he expects the government to react to an eventual acceleration, Costa said it would likely challenge the move in court, raising the spectre of more lengthy and expensive legal battles.
That in itself, analysts said, might deter some investors from demanding immediate payment on bonds.
Herald staff with Reuters, AP, Télam, DyN