Paul Singer versus the republic of Argentina is over.
Some 15 years after the country carried out the biggest sovereign default ever, and 13 years after the hedge-fund billionaire first sued for repayment, the two sides reached a settlement late Sunday. The deal marks a major milestone for Argentina and its new president, Mauricio Macri, restructuring the lion’s share of the debt remaining from the default and freeing up the nation to tap international markets for much-needed financing as its commodities-rich economy falters.
It also brings a close to a bruising, at times ugly, conflict that cost both sides dearly over the years -- in legal fees, lost investment opportunities and countless headaches. Argentina had even become something of a pariah state, unable to fly its presidential plane or dock its naval ships in some cities abroad out of fear they’d be seized by Singer’s lawyers. In financial circles, the two names will be forever linked, like George Soros and the Bank of England or Jim Chanos and Enron. And their drawn-out feud serves as a cautionary tale for both cash-strapped governments flirting with default and the combative speculators looking to fight them in court.
“It’s definitely the longest, high profile holdout case I’ve ever seen,” said Edwin Gutierrez, a money manager at Aberdeen Asset Management. “There are some, but none have been this high profile and of this magnitude.”
The accord, which triggered gains today in Argentine bonds, calls for the country to pay $4.65 billion in cash to Singer’s Elliott Management and fellow hedge funds Aurelius Capital Management, Davidson Kempner and Bracebridge Capital, according to a court-appointed mediator. The amount includes $4.4 billion for 75 percent of almost $5.9 billion in principal and interest of claims in New York, as well as $235 million for claims outside that jurisdiction and some of the holdouts’ legal fees, the mediator, Daniel Pollack, told reporters Monday in New York. The nation will raise the funds it needs in overseas bond markets and the agreement will expire April 14, he said.
After years of dealing with former President Cristina Fernandez de Kirchner’s intransigence on the issue and her seeming disinterest in adhering to U.S. law, New York courts have lauded Macri’s efforts to make good on his campaign pledge to put an end to the litigation shortly after beginning his term in December. Officials began traveling to New York to meet with creditors in January and published their first proposal to creditors Feb. 5.

Deal Terms

Terms of the agreement are better than the previous offer of 72.5 percent of creditors’ claims and mark a significant improvement from earlier restructurings that imposed losses of about 70 percent on debtholders. About 7 percent of creditors, including Elliott, rejected those initial deals -- which were offered in 2005 and then again in 2010 -- and pursued repayment in court.
The dispute had deteriorated over the years into a contentious affair that bordered on the uncivilized on many occasions, like when Fernandez called the 85-year old judge who presided over the case “senile” or referred to Singer as a “Vulture Lord” and “bloodsucker.” As Singer ramped up his efforts for repayment -- at one point he briefly seized a naval vessel -- the feud evolved beyond an issue of paying one’s debts into one of defending national pride and sovereignty that Fernandez tried to pass along onto the next generation.
Video games, board games and cartoons were created to teach children about the dangers of vulture investors, and the business school at the University of Buenos Aires boasts a debt museumdevoted to the saga. After Argentina won the World Cup semifinals in 2014, the crowd’s patriotic victory chants turned into a profanity-laced taunt of the hedge funds. Even toward the end, as Macri’s team took over the talks, the two sides were still sniping at each other: The hedge funds described Argentina’s recent legal tactics as manipulative and abusive while Finance Minister Alfonso Prat-Gay had said that if talks stalled, it wouldn’t be Argentina’s fault.

Congressional Approval

While the announcement was widely expected, markets posted small gains today. Prices on the government’s benchmark bonds due 2033 climbed to 117.6 cents on the dollar while yields on local-law bonds due 2017 declined to 6.38 percent.
The agreement comes weeks after Argentina agreed to pay more than $3 billion to other holdouts, including 50,000 Italian bondholders. All of the accords still require approval from Argentina’s Congress, which also needs to repeal a law that currently prevents the country from proposing terms to the holdouts that are better than those the nation offered creditors in earlier restructurings. Congress reconvenes next month and Federico Pinedo, the provisional Senate president, said he anticipates the legislation earning final approval by early April.
“I don’t think the terms of this agreement would be the reason why they don’t get this approved,” said Diego Ferro, co-chief investment officer of Greylock Capital Management. “There’s nothing outrageous or surprising about this deal for the opposition to use it as an excuse."
Still, Elliott’s not taking any chances. The firm, which manages about $27 billion in assets, filed court papers today urging Griesa not to drop the injunctions, arguing that they protect the hedge funds should the agreement fall apart before it’s finalized.
Only a small group of holdout creditors now remain. Pollack said he will continue to broker negotiations between them and the government, working off of the framework laid out in the Feb. 5 proposal. Michael Spencer, an attorney for a group of smaller investors with more than $832 million of claims on defaulted bonds, said his clients haven’t been able to negotiate directly with Argentina yet. “I hope they are motivated to offer my clients an even better deal,” he said by phone.

Bond Sale Plans

With approval from U.S. District Judge Thomas Griesa, the settlement will probably allow for the release of about $3 billion of interest payments that he’s blocked since mid-2014 and the reversal of his orders prohibiting Argentina from paying restructured bonds unless the holdouts were also paid. Fernandez had refused to comply with the ruling, pushing the nation then into its second default in less than two decades.
After eight years of Fernandez policies that drove away investors, the pressure is on Macri to put the debacle behind him, lure foreign money to revive a faltering economy and replenish dwindling foreign reserves. Within his first week in office, he lifted capital controls that had prevented companies from repatriating dividends and devalued the peso, ending years of a gradual-decline policy that kept the currency overvalued as inflation soared.
The accord with the holdouts is the final step to allow Argentina to return to international credit markets. The country, which hasn’t sold bonds abroad since the default, has settled arbitration cases at the World Bank, paid Spanish oil company Repsol SA for the expropriation of YPF SA and negotiated with the Paris Club of creditor nations.
Alejo Costa, the head of strategy at Buenos Aires-based brokerage Puente, estimates Argentina will need to issue about $11 billion dollars to pay the holdouts and an additional $8 billion dollars to fund its fiscal needs. Selling that much debt, especially at a time when emerging markets are suddenly out of favor, “will require the government to do a good job communicating its strategy on the fiscal and monetary side.”
The government is talking to banks and will sell two or three bonds to finance the deal, Finance Secretary Luis Caputo said from Buenos Aires. Once the holdouts are paid, Argentina will eventually be able to issue debt at similar borrowing costs to neighboring Uruguay, at about 4.5 percent, Prat-Gay said at the same press conference.
“We can say that Argentina is beginning to exit the default definitively,” said Prat-Gay. “The question we must ask is: If we were able to do this in three months, why did it take 15 years?"