Argentina Bonds Tumble Further After 'Swap' Plans Unveiled, Then Ruled In Violation

After 2 days of weakness following the SCOTUS decision against them, Argentina unveiled a plan to restructure their debt - swapping existing foreign law debt to local law (more manipulatable and less legally enforceable) bonds, though Citi warns "implementing [the swap] may be technically challenging.". This 'voluntary swap' action is not a clear 'default event' but CDS spreads surging to over 3000bps and longer-dated bond prices tumbling once again suggest the market believes the path is clear as holdouts will once again hold out. As we explained here, there are five main scenarios and it appears, given these actions - that Argentina is playing hardball and will restart negotiations over the debt exchange. As Jefferies warns, "there's a high chance of default," but Argentina's economy minister Kicillof explained "everyone stay calm, the reconstruction of Argentina is not jeopardized." This plan was then ordered in violation of the anti-evasion policy SCOTUS set in place.


Bonds are tumbling...


And CDS soaring...


As Bloomberg reports,

Argentina will seek to move its overseas bonds into local jurisdiction to skirt a U.S. court ruling forcing it to pay holders of defaulted debt in full.


The swap will ensure holders of restructured bonds keep getting paid while allowing Argentina to avoid complying with the U.S. ruling, Economy Minister Axel Kicillof told reporters yesterday. Cabinet officials will meet with lawmakers today to discuss how to shift investors into local-law bonds while the government will also send lawyers to meet with U.S. District Judge Thomas Griesa in New York to discuss the ruling, he said.


If the government doesn’t modify its current strategy, Argentina is on the path to firstly be in contempt of New York’s courts and then to enter into default on all of its debt,” Luis Secco, the director of Perspectiv@s Economicas in Buenos Aires, wrote in a report.


Of the possible scenarios, this was the most adverse,” Roca said in a telephone interview from New York. “Until the moment that they miss the June 30 payment and the 30 days of grace has passed, I’m reluctant to say they’ll default. But they’re certainly heading that way.”

Tick tock...

Simply put, the Swap deal is a bargaining chip as Argentina hopes to get a large enough group of bondholders so as to pass the "voluntary" swap deal. The question is - how many of the swappable bonds are CAC-able (i.e. can be levered by the group)? We suspect the holdouts are not - and will remain holdouts leaving the issue of the June 30 payment still crucial (and that is why bonds and cds are tumbling).


Credit Suisse believes Argentina's strategy will violate SCOTUS anti-evasion orders...

Those orders say that “the Republic shall not – either directly or through any [representative acting on its behalf] – take any action to attempt to evade the purposes and directives of the Amended February 23 Orders, attempt to render those Orders ineffective, or attempt to diminish the Court’s ability to supervise compliance with the [Orders], including without limitation, altering or amending the processes or specific transfer mechanisms by which it makes payments on the Exchange Bonds, without prior approval of the Court.”


Kicillof also said he has instructed Argentina’s lawyers to speak with Judge Griesa. The apparent purpose of this is to explain to the judge that complying with his orders would force Argentina to default. In this context, they could ask Judge Griesa for approval to carry out the foreign for local law exchange. Kicillof did not mention anything about communicating to Griesa any intention to negotiate with the holdouts. We would be surprised if Griesa were sympathetic to Argentina at this stage.


The pari passu injunction and anti-evasion orders could complicate execution of this swap. If not amended, they could make it difficult for U.S.-based entities to participate as investors or intermediaries. They could also jeopardize the access to additional foreign financing sources that Argentina has worked to re-establish over the past year. Being in contempt of court would probably inhibit Argentina’s return to international capital markets.


The strategy announced yesterday points to a selective default. Standard and Poor’s said yesterday that a swap into local law would be considered a distressed debt exchange based on its criteria, which would lead them to downgrade Argentina to SD (selective default). A selective default on foreign law bonds would not be official until the end of the 30-day grace period. The Discounts would be in default if Argentina does not pay by 30 July, while holders of Pars and Global 17s could accelerate the maturity of their holdings (i.e., cross-default). CDS contracts would also be triggered at the end of the grace period.

And just as we warned...


Of course, the big question is simply how enforceable is this? Just how worried is Cristina?

The market's reaction to this is strength in the 'defaulted' bonds as the likelihood being paid out pari pasu increases...


It seems just like in Greece, it pays to wait...


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