The decision by Judge Thomas Griesa in New York to lift the injunction that prevents Argentina paying debt on international bonds – effectively preventing the country from tapping the capital markets – is a small but important victory for the new Macri administration.
The ruling will not come into effect immediately: the holdouts have an appeal that prevents Griesa’s judgment from having jurisdiction and there is a possibility that it will just lead to renewed rounds of litigation.
“There hasn’t been any new, direct international issuance for about a decade and a half, so we expect a lot of interest,” says one banker who declines to be named because he says his bank is engaged in sensitive discussions with the sovereign. “There will also be good technical support around the accumulation of coupon pending the payment of debt around the pari passu bonds. I would think that, in total, technical demand could be as much as $3 billion to $4 billion, which would be a boost to the book-building process.”
Daniel Chodos, Latin American strategist at Credit Suisse, thinks Argentina could target more than $10 billion of issuance once it returns to the markets to fund the holdout payments and raise finance for a government under fiscal strain.
“In terms of position, the EM dedicated investors are still underweight Argentina, so they will likely be the marginal buyers of Argentina debt,” says Chodos. “It could be difficult for the market to absorb more than $12 billion of potential new issuance from Argentina, but I don’t think it is impossible if it is well implemented and the pricing is attractive.”
Chodos says the country would further benefit from technical support due to Argentina’s increased weight in EM indices. “Since Argentina’s weight in the main EM bond indices will increase, that will force real money investors to buy,” he says. “One risk is that distressed investors, currently the main holders of exchanged bonds, will eventually unwind their positions in Argentina, creating additional supply in the market.”
Predicting pricing levels is difficult given current market volatility. “Bond spreads have increased in EM, which is a risk to Argentina because it creates competition in international debt markets,” says Chodos. “Brazil is trading in the 7% area and US high yield is at 10%, so Argentina will have to compete with that.”
Too much good news
Another banker is sceptical of suggestions that Argentina could come below Brazil. “Are investors going to price nearly 500 basis points below US high yield? I very much doubt that.”
Carl Shepherd, fixed income portfolio manager at Newton Investment Management, is wary of the credit. “Everything investors wanted to see seems to have been taken as a given, and there has been too much good news priced in,” he says. “That can expose valuations to a quick turnaround in sentiment. Ultimately there is still a lot to be done, and with low reserves and high debt levels – and still a twin [fiscal and current account] deficit – so there are still risks there and I don’t think it is being priced correctly.”