BlackRock Support Worthless as Defeat Signaled: Argentina Credit

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Feb. 27 (Bloomberg) -- Bond traders are becoming convinced Argentina will lose its case against holdout creditors in U.S. courts, dismissing the support of money managers including BlackRock Inc. that backed the nation’s claims.

The extra yield that investors demand to own Argentina’s overseas bonds due in 2017 over the same notes issued under local law surged to a record 2.46 percentage points last week. The 2017 debentures governed by New York law now yield 15.66 percent, more than triple the average in emerging markets.

An appeals court will hear arguments today on U.S. District Court Judge Thomas Griesa’s November decision ordering Argentina to repay holders of debt from its $95 billion default in 2001 when it pays its performing bonds. The deepening rout on the overseas debt is a sign that arguments filed by BlackRock and Gramercy Funds Management LLC, which own the notes from restructurings in 2005 and 2010, will fail to sway the court in Argentina’s favor, Barclays Plc said. Local dollar notes have gained on speculation they will be out of the court’s reach.

“The market is seeing the probability the court will rule in favor of the holdouts is about as high as in November, when things were already looking pretty bleak for Argentina,” Sebastian Vargas, an analyst at Barclays in New York, said in an e-mail. “The market adjusted to reflect the same chances of success. The briefing period added little substance.”

Pari Passu

Norma Madeo, spokeswoman for the economy ministry, declined to comment. Economy Minister Hernan Lorenzino traveled to New York for the hearing, Madeo said yesterday.

Yields on bonds governed by foreign law rose above those of local law for the first time on Nov. 1, four days after the U.S appeals court upheld Griesa’s decision that a clause in the bonds known as pari passu, or “equal footing” in Latin, means that Argentina must treat all bondholders equally and make payments to holders of defaulted debt.

Argentina has $27.4 billion of bonds sold under foreign legislation, equal to about 15 percent of its $183 billion in restructured debt, according to data from the economy ministry.

Forty-seven percent of outstanding bonds sold by Latin American governments, or $206.3 billion, were issued under New York law, data compiled by Bloomberg show.

“Local law bonds are protected from the outcome of this case,” said Agostina Nieves, an analyst at Buenos Aires-based brokerage Puente Hermanos SA. “That’s why there’s greater demand for them.”

‘Near Certainty’

BlackRock, Gramercy Funds and other investors holding Argentina’s restructured bonds said in a Dec. 28 court filing that the order threatens their rights to receive payment.

The holders of restructured debt issued in 2005 and 2010 said it’s a “near certainty” that Argentina won’t make payments on any bonds if the lower court’s order stands, according to the filing.

Brian Beades, a spokesman for New York-based BlackRock, didn’t respond to telephone calls or e-mails seeking comment on the brief. Katrina Allen, press official for Gramercy, declined to comment.

Julian Adams, who manages $75 million in emerging-market bonds at Adelante Asset Management Ltd., is avoiding Argentine debt altogether.

“It’s a highly naive view because there’s no question that if there’s a default, that would affect all bonds,” he said in a telephone interview from London. “We’ve held New York and U.K. law but we’re happy to not hold any Argentine debt now.”

Yield Spread

The extra yield that investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries is 11.15 percentage points, or 1,115 basis points, the highest in emerging markets after Belize. Yesterday it narrowed 23 basis points, according to JPMorgan Chase & Co.’s EMBI Global index. The peso fell 0.1 percent to 5.0380 per dollar.

The price of credit-default swaps to insure $10 million of Argentine government debt against default for five years has surged 835 basis points this year to 2,277 basis points, according to data compiled by Bloomberg.

While President Cristina Fernandez de Kirchner has vowed to never pay holders of the nation’s defaulted debt that she’s dubbed “vultures,” her government has said it’s committed to continue servicing its performing bonds.

“We have paid our debt without borrowing from capital markets, with our own funds,” Fernandez said in a Nov. 28 speech in Buenos Aires. “We’ll continue to honor our commitments.”

Debt Payments

Since 2010, Argentina has used central bank funds to pay international creditors. This year it earmarked $8 billion of reserves to pay the total $10.3 billion it owes. The country’s reserves have fallen $1.5 billion this year to $41.8 billion.

Bank of New York Mellon Corp., trustee for restructured Argentine bonds, said in a Dec. 28 filing to the appeals court that Griesa’s ruling would force it to violate contracts.

He ordered BNY Mellon to help carry out the ruling by withholding funds from restructured bondholders until Argentina pays principal and interest on defaulted debt, according to the bank’s filing.

Even if Fernandez ignores the court ruling and tries to re- route payments for its restructured debt, it would still trigger a “technical default,” Nieves at Puente said.

“The market is pricing in a technical default, where the terms of the bonds are changed even if holders continue to get paid,” she said in a phone interview. “Because of that risk, we prefer to have positions in local-law bonds.”

--With assistance from Katia Porzecanski in New York. Editors: Daniel Cancel, Lester Pimentel