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August 03, 2014


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"Why not? Well, for every minute that Argentina is in default, the unpaid coupons accrue interest at an annual rate of 8.28%." That is a fair point as it relates to accelerating the discount bonds. However, what about the par bonds (2038 bonds)? It seems (though not 100% sure) that they can be cross accelerated, they're only trading at 51 cents on the dollar and their coupon is only 2.5%. Thoughts?

Great question!

I did some checking; the par bonds can be accelerated if 25% of their holders so choose.

The yield on the par bonds is only around 5%, but that's still not nothing. I don't think the par bond holders would so choose, given the risk.

What risk, you ask? Well, should the bonds be accelerated (i.e., "called" in layperson's langugage), then it's quite likely that the Argentine government will just throw up its hands and remain in default. If that happens, then the value of the par bonds will drop by at least half. (Historically, Latin American bonds in default traded for about 25% of par.) That would be ugly.

Another possibility is that the Argentines could just mail physical checks to the bondholders. Those checks could not be cashed, of course, but the Argentines could then argue that the bonds were not in default and could not accelerated. I doubt that would hold up in court (and I can't imagine analysts or traders buying the logic) but it would slow any attempt to call the bonds.

If that's the counterfactual, better to just sit and collect the interest, I think. No?

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