Argentine holdout fund: No private approach worthy

Reuters with CNBC

Aurelius Capital Management on Thursday shot down speculation that the hedge fund was fielding a viable private-sector proposal for selling its untendered Argentine sovereign debt in a bid to shorten the amount of time Argentina is in default.

Failure on Wednesday to reach an agreement between the holdouts, led by Aurelius and hedge fund Elliott Management, and the government to settle a dispute before the midnight Wednesday deadline put Argentina into default for the second time in 12 years on its foreign law bonds.

Argentina's Economy Minister Axel Kicillof speaks to the media at a press conference at the Argentine Consulate in New York July 30, 2014.
Carlo Allegri | Reuters

Bonds governed by local law are unaffected.

"While Aurelius has at times been approached by private parties, or purported intermediaries for unidentified private parties, regarding the possible purchase of a fraction of our untendered Argentine bonds, much of what we have read in the press about such approaches has been, as far as we are aware, inaccurate or unreliable," Aurelius said in a statement.

"Aurelius has received no such proposal that we considered worthy of serious consideration. We do not undertake to comment further on this topic," the firm said.

Earlier news reports said JPMorgan Chase & Co was involved in one such approach, but the investment bank's spokesman said "no comment" when asked about the unsubstantiated stories.

Dow Jones reported earlier Thursday that JPMorgan was discussing the possibility of buying Argentina's sovereign debt from a group of dissident bondholders, citing sources familiar with the matter.

Read More Argentina defaults for second time in 13 years

The Dow Jones report said buying the bonds is one of many options and the talks between JPMorgan and bondholders were still fluid.

U.S. District Judge Thomas Griesa, who is overseeing Argentina's bond dispute, scheduled the next hearing for Friday.

Argentina disputing debt default
Argentina disputing debt default

Is it a credit event?

Argentina, Latin America's third-biggest economy, defaulted after the failure of talks with what it called "vulture" creditors as focus turned to whether big banks and funds would request the declaration of a "credit event."

Read MoreIn hedge fund, Argentina finds relentless foe

Argentine Cabinet chief Jorge Capitanich hit out at U.S.-court appointed mediator Daniel Pollack, calling him "incompetent". Capitanich urged holders of Argentina's exchanged bonds to demand their money from the U.S. judge who blocked a June 30 payment, triggering the path to default.

The International Swaps and Derivatives Association (ISDA) has agreed to consider whether a credit event has occurred on Argentina's credit default swap contracts (CDS), according to its website.

Swiss bank UBS on Thursday submitted the request for ISDA's determinations committee to consider whether a "failure to pay" credit event has occurred, citing a missed deadline to deliver interest payments to exchange bondholders.

ISDA's 15-member committee is expected to vote on whether a payment on Argentine CDS contracts can be triggered in the next couple of days, according to a source close to the discussions.

Any ruling that a credit event had occurred would set off a series of insurance payments and give most of Argentina's current bondholders the right to demand their money back immediately. The deadline is Monday, according to analysts.

Credit Suisse earlier said CDS were "likely to be triggered".

Emiliano Surballe, fixed income analyst at Bank Julius Baer, said: "It is still not clear whether the credit default swap of the country will be triggered. The situation that generated the default was a lawsuit, not the failure of the country to transfer the proceeds to pay existing debt."

Argentina parked with its bankers the money to pay its current bondholders, but a U.S. legal ruling prevented it from doing so unless it paid off the holdout bondholders first.

"It's probably going to be more a soft default scenario where prices will slide a bit. There is confidence in what the government is going to do," said Rune Hejarskov, senior portfolio manager at Jyske Invest, which holds Argentinian debt.

The default could get much messier and take longer to clear up if creditors force an "acceleration" for early payment on their bonds. Some investors saw this as unlikely.

"I don't think at the moment there is a clear answer to whether bondholders will accelerate a deal. It's probably not something most bondholders would like to see," said Olivier De Timmerman, fixed income fund manager at KBC Asset Management in Luxembourg.

The bonds at the center of the struggle had rallied strongly on Wednesday along with Buenos Aires stocks and the peso as bets on a deal rose, but traders were left up in the air after the talks fell apart. "We expect part of (Wednesday's) rally to come back to couple of points. ... Discount bond (bonds given to investors when Argentina restructured) prices will come back a bit and we will probably see a fair value around 85." Hejarskov said.

Even a short default will raise local companies' borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world's highest inflation rates.

Argentina slides into default again
Argentina slides into default again

Very particular default

Argentina had sought in vain a last-minute suspension of a ruling by Griesa in New York to pay holdouts $1.33 billion plus interest. He ruled Argentina could not service its exchange debt unless it paid the holdouts at the same time.

Cabinet chief Capitanich insisted Argentina was not in default as it had honored the June 30 coupon payment. Those funds are now stuck in limbo with Trustee agent Bank of New York Mellon.

"Argentina paid," Capitanich said. "As such, the bondholders should demand their money. (To say) that Argentina is in a technical default is an absurd hoax intended to destroy the whole restructuring process."

Bank of New York Mellon said in a statement bondholders "shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee."

A proposal for Argentinian banks to buy out the hedge funds' nonperforming debt also fell through, sources told Reuters.

Argentina's latest debt crisis is a far cry from the mayhem following the crash in 2001-2002 when the economy collapsed around a bankrupt government and millions of Argentines lost their jobs.

This time the government is solvent. How much pain the default inflicts on Argentina, which is already in recession, will depend on how swiftly the government can extricate itself from its obligations.

"This is a very particular default, there is no solvency problem, so everything depends on how quickly it is solved," said analyst Mauro Roca of Goldman Sachs.

Buenos Aires had argued that agreeing to the hedge funds' demands to pay them in full would break a clause barring it from offering better terms than those who accepted steep writedowns in the 2005 and 2010 swaps.

Capitanich said any deal between third parties and the holdouts would not violate the so-called RUFO clause.

The clause expires on Dec. 31, after which the government would also be able reach a deal with the funds. Many investors and economists hope for some solution after then.

—By Reuters, with CNBC

Correction: This story has been updated to reflect that the next hearing in the dispute is scheduled for Friday.