June 3, 2020 / 3:04 PM / a month ago

Argentina default insurance holders gear up for payout

LONDON, June 3 (Reuters) - Holders of some $2.2 billion worth of default insurance on Argentina’s sovereign debt are getting closer to receiving a payout after a committee ruled that a “failure to pay” credit event had occurred when it missed an interest payment in May.

Credit default swaps (CDS) allow investors to insure the bonds they own against default and can also be used to bet against a particular sovereign’s debt. They are arranged between two private counterparties, meaning Argentina itself — a serial defaulter — is not on the hook for a payout this time.

The sovereign’s ninth and latest default occurred on May 22 when the government, seeking to revive an economy battered by recession and a plunging currency, missed an interest payment of $503 million, after the expiry of a 30-day grace period.

CDS holders moved a step closer to collecting their money after the Americas Credit Determinations Committee ruled on Monday that the missed payment constituted a “failure to pay”.

Comprising more than a dozen major banks, hedge funds and fund managers, the committee is responsible for applying the terms of market-standard credit derivatives contracts to specific cases.

Its members include Elliott Management Corporation, the $40 billion hedge fund headed by Paul Singer, which has brought numerous lawsuits against Argentina over previous defaults.

The decision means an auction of Argentina’s bonds will be held to determine the level of compensation CDS holders will receive.

Around $2.17 billion in net notional Argentina CDS need to be settled, more than at the time of the country’s last such auction in 2014. Some $1.24 billion are single-name CDS while $933 million are linked to Argentina’s membership of emerging market indexes, said Jonny Goulden, an analyst at JPMorgan.

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The exact payout CDS holders will receive will depend on where bond prices are trading at the time of the auction.

The bonds used to determine the final settlement, known as “cheapest-to-deliver”, could include a yen-denominated par issue which trades below 30 cents on the dollar, Citigroup said in a recent research note. Based on that and upfront five-year CDS trading levels, expected recovery could be around 32 cents, Citi estimated.

CDS holders will keep an eye on how debt restructuring talks on the $65 billion of bonds progress. Argentina’s government on Monday extended a deadline for negotiations with creditors to June 12 and said it may sweeten its most recent restructuring offer after a previous proposal was rejected by some investors.

“Views around the discussions with bondholders will determine the recovery rate and that is an unknown at the moment,” said Goulden.

“It could be we still don’t know what the final outcome of the bond restructuring process will be, and if the bondholders are successful at negotiating up in the process we could be back at higher prices. And if they’re not, then we could be back at square one and settling CDS at much lower bond prices.”

Creditors are asking for a deal that would provide more than 50 cents on the dollar and the government was offering about 45.

The volume of outstanding Argentina CDS and trading of them has dropped from late 2019 peaks.

This was due to sliding bond prices and rising speculation that Argentina could default again after new president Alberto Fernandez set a goal of overhauling Argentina’s debt burden — originally by March 31.

Some trading is still happening, although less than the one-month moving average.

“There may be some adjustment of positions ahead of the auction or some interest in using the CDS to trade the recovery rate,” said Goulden.

Reporting by Tom Arnold and Karin Strohecker; Editing by Catherine Evans

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