Published November 29, 2012
BUENOS AIRES – Argentine bond prices rallied on Thursday after fears of an imminent debt default receded when a U.S. appeals court gave the country an unexpected reprieve in a legal battle with holdout creditors.
The 2nd U.S. Circuit Court of Appeals' decision to grant an emergency stay order gives Argentina more time to fight a ruling favoring "holdout" investors who rejected two restructurings of defaulted bonds to fight for full repayment in the courts.
It delays a ruling on whether Argentina will have to pay $1.33 billion to the holdouts until late February at the earliest, quelling investor fears of a default next month when some $3.3 billion in repayments are due.
"It's very positive because (the U.S. court) has pushed out the stay order until March and that means the government gets more time to see what it can do," said Kevin Daly, a portfolio manager at Aberdeen Asset Management in London.
The cost of insuring Argentine debt against default tumbled across the curve and bond spreads - measuring default risk against that of safe-haven U.S. Treasury paper - narrowed 173 basis points, according to JP Morgan's Emerging Markets Bond Index Plus.
Last week, U.S. District Judge Thomas Griesa ordered Argentina to deposit $1.33 billion by December 15 to pay the holdouts, who are led by NML Capital Ltd and Aurelius Capital Management.
The ruling was a huge setback for Argentina's combative, left-leaning President Cristina Fernandez, who calls the holdout funds "vultures" and has vowed never to pay them.
The standoff dismayed investors who took part in the two debt swaps because they feared the country would refuse to pay and hence fall into technical default on about $24 billion in restructured debt.
Fernandez's government is due to pay exchange bondholders at least $3.3 billion in principal and interest in December, mostly on a mid-month coupon payment due on its growth-linked warrants.
If Griesa's demand for payment of the $1.3 billion into an escrow account had been upheld and Argentina had refused to pay, U.S. courts would have been able to embargo payments to the creditors who accepted the debt restructurings.
Wednesday's appeals court postpones that possibility.
"The risk of the stay being lifted again in the near term seems low, in our view. We expect the stay to remain in place until the appeals court reaches its decision," investment bank Credit Suisse wrote in a briefing note.
"It is almost impossible to predict how long it will take the appeals court ultimately to rule on the appeal following the arguments," it added.
Sovereign bonds rose 5.5 percent on average in early over-the-counter trade, while dollar-denominated GDP-linked warrants surged 19 percent in opening deals on the Buenos Aires Stock Exchange to a bid price of 77.80.
According to Markit data, Argentina's six-month credit default swaps fell to 20 percent in upfront terms from 41 percent at Wednesday's close. That implies a cost of $2 million to insure $10 million of Argentine sovereign debt for six months, down from $4.1 million.
One-year CDS tumbled to 30 percent from 48 percent and five-year to 46 percent from 55 percent.
"Happiness will be back in the market for sure for a couple of days," said Sabrina Corujo, a trader at Buenos Aires-based brokerage Portfolio Personal.
(Additional reporting by Sujata Rao and Carolyn Cohn in London; Writing by Helen Popper; Editing by James Dalgleish)