Thursday, June 19, 2014

Credit Watch June 19 , 2014 -- Ukraine about to find out Putin is still " Daddy " --As Ukraine Launches A Debt Restructuring, Is Russia About To Become A "Holdout" Activist Investor ? At the risk of sounding like a broken record , are we really surprised Argentina is about to default once again ? Details - Argentine Default Looms; Refuses To Negotiate; Admits Next Bond Payment "Impossible" ........ China shadow banking and dubious structured products in focus !


As Ukraine Launches A Debt Restructuring, Is Russia About To Become A "Holdout" Activist Investor?

Tyler Durden's picture

With Argentina suddenly no longer able to kick the can any longer in its decade long fight with holdout investors, and warning that unless the covenants of the foreign law bonds are stripped in effect making them local-law bonds (and undergoing an event of default for CDS purposes), everyone is focusing on how soon until the sovereign default parade will again resume, following the Greek technical bankruptcy two years ago. Yet the next sovereign restructuring may not come from Argentina first, but from the Ukraine, which as Reuters reports is holding talks with creditors on the restructuring of its foreign debt. Unfortunately for the country, this attempt at a "voluntary" restructuring is coming at the worst possible time.
From Reuters:
Ukraine is holding talks with creditors on restructuring its foreign currency debts, an official from an international finance association said on Thursday following recent meetings with Ukrainian officials.

Lubomir Mitov, an economist with the Institute of International Finance, said that while Ukraine's finances were precarious, it was too soon to say whether it would need to change the terms of its debt.

Mitov said Ukrainian officials stressed they would avoid forcing any so-called haircuts on bondholders in a restructuring.
Taking a page from the Greek playbook, Ukraine is fixated on making it quite clear that creditors would be, make that should be, unanimous in agreening to a restructuring. Which is clear: as the endless days of Greek bondholder negotiations taught us, the inability to have the vast majority of holders agree on a change in bond terms, i.e., a restructuring, would mean an event of default.
"The Ukrainians authorities made very clear to us that they would consider this only as a really, truly voluntary operation agreed by the bondholders," Mitov told journalists by phone. "A voluntary exchange or maturity extension could be one of the sources for financing."
Basically, the only question is whether the restructuring of insolvent Ukraine which has lost its industrial eastern regions to "separatists" and is no longer capable of servicing its existing debt, takes place during a sovereign default or without one, allowing the country to seamless continue its existence as if it was the country that issued the original bond, under the original conditions (hint: it isn't).
Alas, this attempt to renegotiate its bonds comes at the worst possible time because just this week the US Supreme Court gave a green light to "voluntary" exchange offer holdouts everywhere to demand priority treatment when holding out from to such "enforced" exchange offers as what Argentina did back then... and what Ukraine is trying to do now.
So absent some major "carrot", most likely coming from Uncle Sam, we wouldn't be surprised if Ukraine was unable to find even a simple majority of participants that would agree to the terms of its exchange offer.
Which leads to another question: which will be the fulcrum Ukraine security, and who will be the vulture investors - here the usual suspect Elliott comes to mind - preparing to "hold out" and scuttle the deal, demanding a pound of flesh in exchange for not holding out.
For now the answer is unclear, which is why once the Reuters news hit, Ukraine bonds tumbled:
But what will make the Ukraine restructuring fascinating is if the "activist" bondholder investors, aka vultures, aka holdouts, are not your usual hedge funds, but none other than the Kremlin, which after accumulating a sufficient stake to scuttle any prenegotiated, voluntary transaction can demand virtually anything from Kiev in order to allow the country to make the required adjustments on its bonds to avoid an outright sovereign default.
Because who else can't wait for Putin Capital Management LP?


Argentine Default Looms; Refuses To Negotiate; Admits Next Bond Payment "Impossible"

Tyler Durden's picture

Argentina's attempt to work around SCOTUS decision in favor of the 'holdouts' was rejected (under anti-evasion orders) last night leaving Argentina no alternative but to threaten to default on its debt. The government called it "impossible" to pay bond service due on June 30, because payment to holders of restructured bonds could not be made unless the 'holdouts' were paid $1.33 billion at the same time (and Argentina's economy minister argues could be up to $15 bn) which the distressed country clearly does not have. For the first time in 12 years, Argentina has agreed to negotiate with the 'holdouts' (has renegged on that negotiation) who refused to participate in two restructurings that followed Argentina's 2002 default but it seems increasingly likely that an even of default looms for Argentina.

Via Reuters,
Buenos Aires is locked in a 12-year legal fight with creditors who refused to participate in two restructurings that followed Argentina's 2002 default on $100 billion in bonds.

In a televised address to the nation on Tuesday President Cristina Fernandez said Argentina was the victim of "extortion" by the holdouts, but that she was still open to negotiations and insisted she would continue to pay the more than 90 percent of creditors who accepted the restructuring terms.


"The lifting of the stay by the Second Circuit makes it impossible to make the next payment on restructured debt in New York, and shows a complete lack of willingness to negotiate under conditions different from those dictated by Judge Griesa," a statement from the Argentine economy ministry said late on Wednesday.

Talks are nevertheless expected between the two sides in New York next week.

The holdout creditors are led by NML Capital Ltd., a division of billionaire Paul Singer's Elliott Management Corp., and Aurelius Capital Management, chaired by Mark Brodsky, who warned that next week's negotiations could prove to be a "charade".


"Pari Passu (equal treatment) requirements impede Argentina from making the June 30 coupon payment to the holders of restructured bonds unless, at the same time, it pays all that is being demanded by the vulture funds, which could be up to $15 billion in total," the economy ministry said.
So Argentina is willing to negotiate, but no one is buying it...
"Argentina’s lawyer has informed the court that unidentified government officials will come to New York on an unidentified day next week to discuss settlement after years of rebuffing settlement overtures," said Aurelius' Chairman Mark Brodsky.

"I have learned not to rely on any assurance Argentina’s counsel provide to our courts. I expect a charade, but I hope to be proven wrong," he added.
And just minutes after we posted this... Argentina rebuffs...
  • “There’s no Argentine mission or committee going to New York,” Cabinet Chief Jorge Capitanich tells reporters in Buenos Aires.
The 2033 ARG bonds dropped notably after yesterday's bounce to trade at 73.375.

One good thing may come from the victory of the 'hold-outs': the government will find it difficult to rack up more debt. Some people quoted by Reuters bemoan that the situation will delay Argentina's return to international capital markets, but Argentina's citizens should probably be relieved to hear it. On the other hand, it may well mean that even more money printing is in store, so we cannot be entirely certain whether the news is actually good or bad in that sense.

One thing is certain though: the economic policies pursued in the country over the past century have consistently failed. No end to this failure is in sight as of yet. The country doesn't need people specializing in Keynes and Marx, it needs a dose of Mises and Hayek.


Wednesday, June 18, 2014 7:29 PM

Eternal Trust Number 37

The Financial Times investigates China’s precarious shadow banking system. The first article in the series is Into the Shadows
 From the window of his office, Qiao Jingshan can look out across downtown Yuncheng and see signs of new construction everywhere. Half-built or empty apartment complexes are scattered across the cityscape bearing names like “Eastar Upward”, “Golden Riverside” or “Stars and River Mansion”.

As chief accountant for Yuncheng City Investment, a financing vehicle for the local government, Mr Qiao has played a crucial role in the development of this gritty steelmaking city in central China. His latest job is to sell his company’s “trust product” – a high-interest, deposit-like investment – with the proceeds going to a big public heating project for Yuncheng.

Despite paying a tempting 9.7 per cent annual interest rate, his product, marketed as “Eternal Trust Number 37”, is not catching on with investors.

The near-default of other Chinese financial products recently has set off alarms – inside China and in global markets – that the country is in the midst of a dangerous credit bubble.

Mr Qiao admits the Yuncheng heating project will not provide any re­turns for his company, a­n un­settling fact for any investor. But he is dismissive that this is the problem.

“All of our investments are public works that should actually be paid for by the local government so when the trust product matures the government should take this project off our hands and give us the money to repay investors,” he says. “Don’t worry, it is impossible for there to be any sort of financial crisis here in Yuncheng.”
Too Good To Be True Promise

Supposedly it's impossible for an investment that yields 9.7% to lose any money. State Owned enterprises investing in economically nonviable projects will never lose money either. Yeah, right.

If it looks too good to be true, it is.

Credit Equals Gold
 Worries about China’s shadow banking system rattled global stock markets this winter, after a wealth management product called “Credit Equals Gold” was reported to be on the verge of default. It was quickly restructured, only to be followed by concerns about a similar product known as “Opulent Blessing”.

Noting how large the sector has grown, many in China warn that the country could face its own “Lehman moment” if it were to see a serious run on shadow banks.

“The [traditional] banks have been very strategic about pushing their weakest assets into these channels,” says Charlene Chu, the former Fitch analyst who was one of the first to raise serious questions about the rise of China’s shadow banking sector and who now works for Autonomous, the research group. “The weakest institutions and creditors are the ones engaged in shadow banking, where bad decisions and bad risk management are the norm.”
Credit Expansion Comparison

Misplaced Concern

The Financial Times states "The concern is that financing could disappear for the most leveraged and riskiest parts of the economy, from real estate developers to steel mills. China’s investment-reliant growth could come to an abrupt end."

That's ridiculous. The concern ought to be that absurd lending to unprofitable, poorly-managed companies and State-Owned-Enterprises (SOEs), continues, not that it ends.

The longer malinvestment foolishness continues, the bigger the ultimate crash.

Mike "Mish" Shedlock