Argentina Bond Battle Enters New Phase

The Wall Street Journal

BUENOS AIRES—Argentina's feud with a small group of creditors is poised to enter a critical phase.

Argentina is on track to miss an interest payment on Monday, setting in motion a 30-day grace period for the country to make the payment and avoid its second default in 13 years. U.S. legal rulings bar Argentina from making payments to creditors that have accepted the country's debt restructurings since it defaulted in 2001, unless it also pays a group of hedge funds that have refused to sign off.

Still, Argentine bonds are trading at levels that suggest investors believe a deal will be reached between Argentina and the so-called holdout creditors. Gorky Urquieta, co-head of emerging-market debt at Neuberger Berman, holds a variety of Argentine bonds in his portfolio and says any potential selloffs could offer buying opportunities. He says he expects the country to miss the interest payment on Monday but ultimately settle with holdout creditors before a default.

"I like the fact that Argentina is under the gun," Mr. Urquieta said. "That's going to make them come to the table."

The market for insurance against an Argentine default does indicate investors are seeking protection. The cost of five-year credit-default-swap protection on Argentine bonds jumped almost 18% Friday. The asking price for protection on $10 million of bonds for five years rose to $3.65 million from around $3.1 million, according to Markit.

Yet investors say they are confident there will be a resolution because Argentina simply can't afford to default again. Another default could be disastrous for an economy that many analysts say entered recession this year because of raging inflation and shortages of U.S. dollars. The Argentine central bank's currency reserves, which the government uses partly to pay its debts, are at a 7½-year low of $29 billion.

Argentina tried to make the payment by depositing more than $800 million with New York banks last week. But a federal U.S. judge on Friday said this attempt violated a U.S. court order, saying Argentina isn't allowed to pay these restructured bondholders unless it also pays some $1.5 billion it owes to a group of hedge funds who refused to accept the country's restructuring offers following its default in 2001.

The development stems from an unusual decadelong dispute that has pitted Argentina against a small group of deep-pocketed hedge funds, including Elliot Management Corp.'s NML Capital Ltd. and Aurelius Capital Management LP. Leaders of developing countries around the world are closely watching the case to see whether the precedent it sets will make it more difficult for cash-strapped countries to restructure their debt, as Argentina has contended.

Monday marks the beginning of what could be a nail-biting 30-day grace period for investors to receive some $539 million in interest due on bonds that are affected by the U.S. court ruling. Argentina and the hedge funds now have the month of July to negotiate a settlement.

Argentine officials refused to pay the holdouts in the past, arguing that a settlement would trigger billions in claims by other creditors and bankrupt the country. Argentina has virtually run out of legal options to appeal the ruling after the U.S. Supreme Court on June 16 denied Argentina's appeal and left in place a U.S. District Court decision that forces the country to pay the holdouts at the same time it pays investors who hold the country's restructured bonds.

The lower court has appointed attorney Daniel Pollack to conduct negotiations between the two parties. Mr. Pollack said in a statement Wednesday that the sides have been in communication with him but hadn't reached a resolution. He declined to elaborate, saying the discussions will be kept confidential "to facilitate the possibility of a future resolution."

Lawyers say it is unclear whether a missed payment on Monday would constitute a "technical default." Standard & Poor's Ratings Services could downgrade Argentina to "selective default" between Monday and the end of the grace period, said Sebastian Briozzo, a senior director at S&P's sovereign-ratings group. S&P cut its rating on Argentina to triple-C-minus from triple-C-plus on June 17.

"At end of day, if the payment doesn't reach exchange bondholders it would be a default under our criteria," Mr. Briozzo said.

Moody's Investors Service wouldn't automatically cut the Caa2 rating it has on Argentina's foreign-law bonds if restructured bondholders don't get paid on Monday, said Gabriel Torres, a senior sovereign-ratings analyst at Moody's. Another downgrade would depend on how much money restructured bondholders are expected to lose as a result of the missed payment. The current rating indicates an expectation of up to 20% in losses for holders of Argentina's restructured bonds.

"To move Argentina lower than Caa2, it wouldn't be enough for the country to default," Mr. Torres said. "There would need to be relatively big losses for restructured bondholders."

Fitch Ratings, which has Argentina at double-C, wasn't available to comment. In late May, Fitch said the rating reflects the "high level of default risk given the ongoing legal dispute between Argentina and some of its holdout creditors."

The price of the country's dollar bonds that mature in 2033, the ones due for an interest payment on Monday, closed at 85 cents on the dollar on Friday, down from 86.5 cents Thursday. The yield rose to 10.3% from 10%; bond yields move inversely to prices.

Write to Ken Parks at ken.parks@wsj.com and Nicole Hong at nicole.hong@wsj.com



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