Topsy-Turvy Bond Market Means No Default Pain: Argentina Credit
Paul Singer, founder and president of Elliott Management Corp., attends the SkyBridge... Read More
To appreciate just how topsy-turvy Argentina’s bond markets have been in 2014, consider this: the nation has rewarded creditors with some of the biggest returns in the world, even after defaulting in July.
Its dollar-denominated debt has returned 17.6 percent this year, more than double the average for developing countries and the most among majoremerging markets after Turkey, according to JPMorgan Chase & Co. The $4.3 billion of securities due in 2033, which Argentina defaulted on in July, trade at 87.9 cents, above the 76-cent average since they were issued under New York law in 2005.
Whether they’re convinced the government will resolve its decade-long debt dispute with billionaire Paul Singer or are optimistic the end of eight years of rule by President Cristina Fernandez de Kirchner in December will lead Argentina to restore its standing in the international financial community, bond investors are decidedly bullish on the nation’s prospects, according to Emso Partners.
“Argentina is enjoying strong sponsorship from a non-EM dedicated investor community, which strongly believes it will be in a fundamentally better place in 12 months,” Patrick Esteruelas, a senior analyst at Emso, which manages $2 billion, said by telephone from New York. “That’s providing a very strong floor on prices and valuations, which should continue to grind up all the way through next year.”
Bond Clause
Argentina’s isolation has shielded it from a global selloff in emerging markets triggered by a plummet in crude oil prices. In the past three months, Argentina’s bonds have lost 1.3 percent, versus a decline of 4.53 percent for junk-rated sovereign notes from Ukraine to Venezuela.
While the expiration of a key bond clause tomorrow will make it easier for Argentina to negotiate with the so-called holdout creditors who hold claims from its 2001 default, investors are more focused on who succeeds Fernandez, according to Luis Caputo, a money manager at Noctua Partners.
Argentina’s current debt crisis stems from an order by U.S. District Judge Thomas Griesa, who prohibited the nation from making payments on overseas debt it issued in 2005 and 2010 until it settles with Singer.
The hedge fund manager refused to accept Argentina’s debt restructuring terms of about 30 cents on the dollar after its $95 billion default in 2001 and successfully sued for repayment in U.S. court. The order doesn’t affect dollar-denominated notes governed by local law.
‘Less Crucial’
Economy Minister Axel Kicillof said on Dec. 13 that the holdouts will have to come back to the government with a more reasonable demand in the new year.
Argentina “isn’t crawling through the desert for the last dollar,” he said.
The country will hold presidential elections on Oct. 25.
“An agreement would be important but it’s less crucial now,” Caputo, who manages a $50 million fund for Noctua composed of Argentine assets, said by e-mail. “The bonds are in strong hands whose bet isn’t a deal with holdouts but a regime change.”
Still, the default has hurt the economy.
Gross domestic product shrank 0.8 percent from the year-earlier period, the national statistics agency reported yesterday. The median estimate of nine economists surveyed by Bloomberg was for a decline of 0.6 percent, after growth stalled in the previous three months.
Distressed Investors
Jane Brauer, a credit analyst at Bank of America Corp., says that Argentina’s bonds may be vulnerable to greater swings because much of the debt is held by distressed investors who seek to opportunistically buy and sell low-priced securities around the world.
“Many of the hedge funds have similar positions in other asset classes and a loss in another position unrelated to Argentina could have a dampening effect,” she said by telephone from New York. “Though not anticipated, they might have to liquidate some bonds.”
For investors willing to stomach the volatility, Emso’s Esteruelas says that the potential rewards outweigh the risks.
“They’ve navigated surprisingly well,” he said. “This government is riding on the shoulders of expectations that it will soon be ushered out of office.”
To contact the reporter on this story: Daniel Cancel in Buenos Aires at dcancel@bloomberg.net
To contact the editors responsible for this story: Michael Tsang at mtsang1@bloomberg.net; Brendan Walsh at bwalsh8@bloomberg.net Lester Pimentel
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