Hedge Fund’s Move Risks Prolonging Argentina Bond Default
Three months after Argentina’s bond default, a hedge fund is in talks to form a group that will demand immediate repayment. The move threatens to deepen the standoff between the nation and its creditors, according to Voya Investment Management LLC and Emso Partners Ltd.
New York-based Owl Creek Asset Management LP, which oversees $3.9 billion in assets, is discussing with investors and law firm Kirkland & Ellis LLP the possibility of organizing bondholders to speed up repayment of notes due 2038, four people familiar with the talks said. Owl Creek, which started its Argentina Recovery Fund last month, said in a presentation that accelerating the so-called par bonds may generate gross returns of 100 percent in a restructuring.
With Argentina mired in its second default in 13 years as it refuses to comply with a U.S. court order requiring creditors from its 2001 financial crisis be paid, Owl Creek’s efforts may lead to more protracted legal battles, said Jean-Dominique Butikofer, head of emerging markets at Voya. A bondholder group would need to hold at least 25 percent of the $5.4 billion of dollar-denominated debt to accelerate after today, when a grace period on the securities expires, the bond contracts show.
“It makes the entire situation more difficult,” Butikofer said by phone from Atlanta. “I understand the mechanics and the reason why they’d want to accelerate the par bonds, but I wonder how will Argentina react if they are being dragged into another legal fight and is it worth the time and attorney costs?”
‘Settlement Negotiations’
In an August presentation obtained by Bloomberg News, Owl Creek said that a restructuring could take place as soon as January, when Argentina may negotiate with the unpaid creditors from its 2001 default. Until those creditors, known as holdouts, are paid, the court order blocks any payments on the nation’s overseas debt.
The par bonds, which traded at 54.6 cents yesterday, “have the right to accelerate and have their principal immediately payable in full,” Owl Creek said in the presentation. “This would lead to a seat in settlement negotiations in January, likely resulting in an exchange into new bonds which trade closer to par.”
Patrick Clifford, a spokesman for Owl Creek, declined to comment. Kate Slaasted, a spokeswoman for Kirkland & Ellis, didn’t return two phone calls seeking comment. Jesica Rey, an Argentine Economy Ministry spokeswoman, declined to comment on the risk of acceleration.
Court Order
Cabinet Chief Jorge Capitanich told reporters today that rather than accelerate, bondholders should seek legal action against the U.S. judge that ruled in favor of the holdouts and blocked debt payments.
Argentine officials have said they can’t negotiate with creditors led by Elliott Management Corp. who rejected debt restructurings in 2005 and 2010 until a key bond clause expires at the end of 2014. While Argentina deposited $161 million into a local bank last month to pay interest on the par bonds, the court order prevents bondholders from getting their money until the dispute with Elliott is resolved.
Three months ago, Argentina defaulted because it was prohibited by the court order from distributing a separate bond payment.
Due Interest
Investors collectively holding at least $1.4 billion of the notes can demand full repayment of principal on the dollar pars, as well as past due interest. The pars, which are also denominated in euros and yen, are the cheapest of Argentina’s overseas notes because they pay the lowest interest rates. That also gives them the biggest potential return in a debt swap.
An acceleration may also threaten Elliott’s chances of getting paid, since it would immediately swell Argentina’s debt costs, said Carlos Abadi, the chief executive officer of New York-based investment bank ACGM Inc.
Stephen Spruiell, a spokesman for Elliott, declined to comment on how the firm would be affected by acceleration.
An acceleration may be a bid to pressure Argentina and the holdout creditors into negotiations, according to Patrick Esteruelas, an analyst at Emso.
“The $5.4 billion question is would par holders use the threat of acceleration to force a resolution of the holdouts, or are they choosing to accelerate simply to get better terms on their bonds,” he said by phone from New York.
Immediate Repayment
If the group that demands immediate repayment holds 50 percent of the securities, it can undo the acceleration once Argentina resumes payment.
Building a majority position in the bonds beyond the 25 percent minimum would “lend some credence to the idea that they want to use the threat of acceleration as leverage to force a resolution,” Esteruelas said.
Still, the move is risky because of Argentina’s history of dealing with foreign creditors, said Voya’s Butikofer.
The nation, which has defaulted seven times since its 1816 independence from Spain, imposed losses of 70 percent in its two most recent debt restructurings and has referred to holdouts as vultures, “extortionists” and “terrorists.”
“Putting more fuel on the fire and forcing any kind of debt repayment through legal enforcement will not please the Argentines,” Butikofer said. “I’d rather watch it with some distance.”
To contact the reporter on this story: Katia Porzecanski in New York atkporzecansk1@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.netLester Pimentel, Bradley Keoun
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