SW's Hinman likes Argentine bonds despite sovereign debt battle
"We like Argentina. Not many people do," David Hinman, chief investment officer at SW Asset Management in Newport Beach, California and former portfolio manager at nearby Pacific Investment Management Co (Pimco), said at the Reuters Global Investment Outlook Summit.
"The valuations are dislocated meaningfully from the fundamentals, and certain parts of the Argentine market either insulate you from or fully compensate you for the legal risks facing the country," added Hinman, whose firm has $391 million of assets under management.
Prospects for a sovereign default reminiscent of the one nearly 12 years ago have loomed amid a battle by Argentina with dissident bondholders who refused to take part in two debt restructurings and insist on being paid in full.
On Monday, a federal appeals court in New York rejected Argentina's request to reconsider an earlier order requiring that the bondholders be paid $1.33 billion.
Argentine President Cristina Fernandez has called the dissident bondholders Aurelius Capital Management and NML Capital Ltd, a unit of Paul Singer's Elliott Management Corp, "vulture funds."
Monday's order sets the stage for Argentina to ask the U.S. Supreme Court to get involved. Its prospects are uncertain.
Hinman said his "base case" is that Argentina's appeal will fail. But he said some Argentinebonds are shielded from this battle, where payments do not need to be funneled through trustees subject to the U.S. court system.
One example is bonds of the province of Buenos Aires, which he said is less dependent on subsidies and guarantees from the central government, and has a low ratio of debt to gross domestic product.
"Certain parts of the corporate sector we believe are also a buy," he added. "Very little interest rate risk, more like equities than bonds. Eighteen to 22 percent yields we think compensate for the risks."
Fernandez, 60, resumed work on Monday after undergoing brain surgery five weeks ago.
That followed heavy losses in midterm elections last month that ended her chances of changing a law that keeps her from running for a third term in 2015.
Hinman said a new government might prove more amenable to compromise with the dissident bondholders, especially if, as he expects, the legal battle is not resolved soon.
"The new administration is likely to be less confrontational," he said. "I certainly think Argentina realizes that the settlement of this issue would lower their overall borrowing costs, and in many ways (views the costs) as a price of doing business of not paying the vulture funds. If there is political cover to do so, either through a new administration or in a way that points the finger at the U.S. court system, ... there would be support for making this situation go away."
Pimco is part of Germany's Allianz SE.
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(Reporting by Jonathan Stempel in New York; Editing by Phil Berlowitz)