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Argentine debt default looms.

Parties have not yet met face-to-face despite the addition of a court-appointed mediator

Argentina, out of legal options to avoid paying a court-awarded $1.33 billion plus interest to holdout creditors who twice spurned a restructuring offer, has until July 30 to either pay them, negotiate a settlement or default.

The parties have not yet met face-to-face despite the addition of a court-appointed mediator who has warned time is running short for Argentina to avoid a default.

A default would be Argentina's second since it missed a payment in January 2002 that affected roughly $100 billion in sovereign debt, and would set back Latin America's No. 3 economy from efforts this year to re-engage with the international financial system.

Argentina, after a contentious period of discussion, held a restructuring in 2005 that saw holders of a very low 76 per cent of the total debt accept the exchange. In a reopening in 2010, the acceptance rate rose to just under 93 per cent.

According to Moody's Investors Service the "losses involved in the debt exchange were large, about 70 per cent in the Argentinean exchange vs. 47 per cent on average for sovereign restructurings."

US District Judge Thomas Griesa ruled in 2012 that Argentina had to treat the holdouts, led by NML Capital Ltd, an affiliate of Elliott Management Corp, and Aurelius Capital Management, equally with the bondholders who exchanged their debt for restructured bonds, or no one would be paid.

Argentina deposited $539 million in the indentured trustee Bank of New York Mellon's account at the Central Bank of Argentina before a June 30th coupon payment on the restructured 2033 Discount bonds. Griesa's order blocks the transfer of the money, leaving it in Argentina until the issue is resolved.

Moody's says Argentina is the only sovereign default out of 34 studied in the modern era to have resulted in persistent litigation.

Below are some facts regarding a potential default by Argentina:

Under normal circumstances, debt payments must arrive in the trustee's account no later than 1 p.m. local time on the day before the money is due in the accounts of Argentina's creditors. Given the cash sits in the BNY Mellon account, around this hour on Tuesday July 29 is arguable the latest a deal can be struck for exchange bondholders to receive their money in time and not have a default.

According to the prospectus of the offering document for the 2005 and 2010 debt exchanges, if Argentina defaults on any debt governed by New York or UK law, then all of the debt under those jurisdictions is considered in default based upon a cross-default provision in the covenants.

Holders of at least 25 per cent of the defaulted debt from 2005 and 2010 must give written notice to both Argentina and the trustee to declare the debt securities are "immediately due and payable." This is known as acceleration.

However, if acceleration is declared because of an event of default, the declaration will be automatically rescinded and annulled if Argentina has remedied or "cured" the default or if these affected bondholders rescind their declaration of acceleration within 60 days of the default.

Holders of more than 50 per cent of the affected bonds can decide to waive the default and rescind acceleration on behalf of all debtholders if Argentina deposits with the trustee enough money to pay all overdue installments of principal and interest, as well as reasonable fees and compensation of the trustee. Waivers can also be declared if all the events of the default have been remedied.

Argentina has claimed that it has made good on its debt payments by depositing the money with BNY Mellon prior to the June 30 due date. However, given it did not follow Griesa's orders to make payment to the holdouts, this argument has already been dismissed by the court.

Credit default swaps

Investors can purchase protection against a default or credit event through the use of credit default swaps (CDS). The International Swaps and Derivatives Association (ISDA) has strict rules that govern whether or not a default or credit event has occurred for CDS holders.

The declaration of a default is made by what is known as the Determinations Committee (DC), which has 15 voting members organized by ISDA. There are five DCs (Americas, Asia excluding Japan, Australia-New Zealand, EMEA, and Japan).

If the DC declares a default, currently the total amount of money that would be paid out to investors who insured their Argentine debt portfolios is just over $1 billion.

Elliott Management Corp is slated to become a member of the DC in all regions, effective November 2014.

The process for determining if a default has occurred starts with a market participant asking the DC to look into the situation via a form on the ISDA website.

A super-majority of 12 out of 15 members must vote in favor of declaring a default or credit event has occurred.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:3ARGE
Date:Jul 27, 2014
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