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Swap: for JP Morgan, a haircut of 55% is acceptable
Clar n
December 07, 2009

It's the level based on what has been leaked. They believe that there would be a big acceptance.

by Gustavo Bazzan

The debt swap to recover bonds in defaultthat still are in the hands of the holdouts has hit an impasse. At the Economy Ministry they assume there are will be no news until all the bureaucratic steps are completed, from here and with the regulatory agencies in the countries where the offer will be presented. In other words, until January there will be little to say. But among financial analysts they continue making predictions on the proposal about the bondholders that should accept or reject the invitation to swap.

In recent days, a report appeared from JP Morgan signed by Argentine economist Vladimir Werning. At last week's prices, he found that the present value of the offer rounds out to 53 cents on the dollar for nominal original value. In that case, the haircut would be only 47%. For the investment bank analyst, it's a more than attractive value. "We believe that if the government confirms an offer whose price would be at least 45 cents (a haircut of 55%), the grade of acceptance should be high."

Werning arrived at 53 cents assuming as valid the proposal that leaked from the three organizing banks for the transaction: a discount bond with a haircut of 66.3%, the GDP coupons that will be delivered as a coupon for a bond, and the two additional bonds: one for interest owed on the discount and another for payments (including the coming December 15 installment) that the GDP coupons accumulated. It also assumes that those who enter the swap will have to subscribe to the emission of a new bond for not less than US$1 billion.

The "limit" price of 45 cents is, for Werning, the one that the government would assure that the bondholders take out new paper in their possession and not choose to liquidate at whatever price (a sell-off) the following day at the closing of the swap. "It's a sufficiently good price to limit the rest of post-swaps sell-offs, over the frustration that a bad arrangement would produce," Werning said.

It's a risk that the government wants to avoid, because it would serve nothing to have the swap if the following day, the country-risk shoots up due to a massive sell-off of paper. For the government, the swap is an obligatory step before going out to seek fresh cash in the capital markets, now that there isn't any doubt that its maneuvering room has shrunk dramatically with the transformation of fiscal surplus to deficit.

To face these risks or not set off a second depart in the financial market, which Clarin reported on days ago: the discussion turned on if it's necessary to deliver to the holdouts a bond for the payments that accumulated on the GDP coupons. Some say that it's "excessively generous" and they argue that the coupons were delivered to those who accepted, in 2005, "to associate with the luck of the Argentine economy" and collected because GDP grew since then. "He who didn't take the risk shouldn't get this reward," is the argument. On the other side, there are those that say the government can't allow itself the luxury of saving on the value of the offer because what it needs is the highest acceptance level possible. "To save a few dollars could lose a big portion of the holdouts that will continue being a stone in the shoe,' they say.

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