Feb 11 Investors starved of good news from emerging markets are preparing to welcome reformist Argentina back into the fold, even those who lost out when it defaulted on $100 billion of debt in 2002.
Argentina's long-running legal battle with hedge funds appears to be nearing a conclusion, with President Mauricio Macri, elected last November, last week offering to pay $6.5 billion to "holdout" creditors who had refused to take part in the debt restructuring rounds of 2005 and 2010.
Representing a payout of about 70 cents in every dollar they demanded along with interest, this would for the hedge funds, be a significantly better deal than the 30 cents or so in the dollar paid in the previous debt swaps.
But investors, even those who suffered losses in Argentina in the past, say they are pleased.
"Does it smart? Not really," said Aberdeen Asset Management portfolio manager, Kevin Daly, whose fund participated in the previous restructurings.
"It is not an issue for us, if anything it is positive because we are overweight (Argentine bonds) so we want it to be resolved," Daly said, noting that he had added to his holdings at the end of last year.
The biggest holdouts, Elliott Management and Aurelius Capital Management, may push for better terms but some of the funds have already accepted the deal. Macri has also settled with an Italian creditor group for $1.35 billion.
Argentine bonds were among the world's best emerging market performers last year and its 2033 "discount" bond hit a record high this week above 117 cents in the dollar, up about 95 cents from mid-2015.
The 2038 "par" bond has risen to the highest since 2001 at around 64.5 cents.
That is despite the fact that Argentina will have to borrow significant amounts on bond markets to finance the deal which, according to some estimates, will end up costing more than $10 billion in total.
But investors are keen for the new issue. First, new bond sales from emerging markets are at seven-year lows, leaving funds short of new debt to buy. Second, the hope is Macri's Argentina is a different place from 2001.
"You have to evaluate the country's management today rather than look back and say 'I will never lend to that country again'," Pioneer Investments head of emerging debt, Yerlan Syzdykov, said.
"The way the market functions is that you have defaults and then restructurings and one has to assume that the mistakes that led to the restructurings of last time have been fixed."
Macri is at least trying to fix the issues.
He has lifted capital controls and power subsidies as well as outlining plans to cut inflation and reduce the budget deficit. A $5 billion bank loan has topped up central bank coffers.
All that makes Argentina a rarity in emerging markets. The developing world is seeing huge investment outflows, stemming from governments' reluctance to implement reforms which might help them withstand global turmoil and slower Chinese growth.
As a result, investors have piled into the few markets where there is still evidence of positive change such as India and, to a lesser extent, Mexico and Indonesia.
"In emerging markets, India is the only country getting good marks from investors. When you ask what they have going for them, it's very simple - reform. And investors love reform," Allianz head of emerging debt, Greg Saichin, said.
"Argentina could get a lot of funds going forward if they manage to turn the page on this episode."
Neuberger Berman co-head of emerging debt, Gorky Urquieta, expects Argentina's credit rating, now in default, to rise to double-B by the end of 2017, just two notches below investment grade.
"Argentina ... has a powerful idiosyncratic component and there is some decoupling from other emerging markets because of (the resolution of the holdout issue)," he said, noting Argentine bonds' recent outperformance versus other emerging market debt.
Borrowing costs will be high however. Given Argentina paid 6.15 percent above benchmark LIBOR rates for its recent one-year bank loan, market participants reckon investors will demand 8-9 percent yields, provided it does not issue too much in one go.
But there will no problem getting the deal away, Exotix head of research, Stuart Culverhouse, said.
"If they are at a point where they can issue, it means various parts of the jigsaw would have fallen in place... After 15 years, people will be euphoric," he said. (Editing by Louise Ireland)