Monday, April 18, 2016

Gov’t launches US$15B bond sale today

Finance Minister Alfonso Prat-Gay claimed last week that the level of demand for Argentine bonds was “awesome.”

Proceeds will be used to pay holdouts, finance President Macri’s economic plan

After sealing a deal with the so-called “vulture” funds, securing the lifting of an injunction blocking the country from servicing its debt and getting Congressional approval, the Let’s Change administration launches today a US$15-billion bond sale to pay holdout bondholders and finance its economic programme.

The government expressedoptimism after two teams of Argentine officials met investors in New York, London, Los Angeles, Boston and Washington last week seeking prices on five-, 10- and 30-year debt, with Finance Minister Alfonso Prat-Gay saying demand for the country’s bonds was “awesome.”

Preliminary reports indicate the interest rate Argentina might offer on the new bonds is in the 7.5 percent to eight percent range. Investors have said the debt sale presents a unique opportunity for an improving credit story in emerging markets, though some have said they would need to see yields of at least eight percent and possibly as high as nine percent to pique substantial interest.

How much interest Argentina ends up getting for such a big sale will be key in determining whether the country will be able to reject the most expensive offers and push for smaller interest rates.

John Baur, portfolio manager for Eaton Vance’s global macro absolute return fund, noted that much of the proceeds will initially be used to pay existing creditors and that Argentina will be selling a lot of paper.

“We think that the government is trying to do the right things, but they have a difficult road ahead of them. By no means is it guaranteed that they’re going to accomplish their objectives and set Argentina on the right course for the future,” he said.

Some fund managers say they are excited to take advantage of Argentina’s first international bond issuance, as the country’s bonds offer some of the highest yields in the world’s sovereigns market.

Given the volume of the bond issue, the operation will be managed by multiple banks: Deutsche, HSBC, JP Morgan, Santander, BBVA, Citigroup and UBS, the government said on Friday.

The new debt will include collective action clauses which would make it much more difficult for minority bondholders to resist restructuring offers against the majority and sue for bigger payment as it happened following 2001’s default.

The issue will be opened tomorrow and offers will be received until Tuesday, with the country expected to pay the holdout bondholders on Friday.

Whatever extra money is raised after all the plaintiffs are paid, the government says, will be used for infrastructure projects, although some analysts argue the dollars will be used to plug a fiscal gap in the country’s budget.

Legal issues continue

Daniel Pollack, the court-appointed mediator in the legal case, says more than US$8 billion worth of claims, or roughly 90 percent of those brought before US District Judge Thomas Griesa in the Southern District of New York, have been settled in principle.

The group led by high-profile billionaire Paul Singer’s Elliott Management negotiated richer settlement terms than what Argentina offered via the public settlement proposal. It and several other large creditors signed a US$4.65 billion deal on February 29.

In response, on March 2 Griesa ordered his injunctions against Argentina only paying some creditors and not the holdouts be lifted, citing the progress in reaching settlements.

But even as a deal has been struck with the leading plaintiffs and most of the so-called “me-too” bondholders demanding a similarly improved payout, smaller lawsuits have cropped up, including a suit filed last week by Greylock Capital Management, a well-known emerging market investor saying Argentina is still not treating investors equally.

Greylock would not comment. It’s lawsuit, which argues the country is not abiding by equal treatment laws, is still pending.

“It’s a small percentage of claims. But to repudiate that debt creates unnecessary bad faith with some important investors at a moment when you need to maximize your issuance capacity,” said Siobhan Morden, head of Latin America fixed income strategy at Nomura.

Lawsuit against Pollack

Mohammad Ladjevardian, a Houston-based investor, says the bonds he bought at full price before the default should be settled on the same terms as Elliott’s deal. But he claims he was unable to get anyone from Argentina to negotiate and in his anger filed a lawsuit against Pollack to have him removed from the case.

Ladjevardian said his experience shows how arbitrary the settlement process can be.

“Our case suddenly resonates with a lot of people,” Ladjevardian said, noting the money was invested for his family, including his now 93-year-old father who lost his fortune after escaping Iran in 1979.

Argentina is aware of the ongoing issues and the prospectus for the bond sale states it explicitly.

“The Republic cannot assure you that further litigation against Argentina will not negatively affect its assets or Argentina’s ability to access the international capital markets or make payments on the Bonds or its other outstanding debt,” the document says.

Others are more positive, as the deal means that they will now be paid again after two years of being blocked Griesa’s injunction against the country.

Brett Diment, head of global emerging market debt at Aberdeen Asset Management in London, noted that his firm has a position in the bonds that Argentina was not paying interest on.

“The new government has reached an agreement with the plaintiffs and to pay those plaintiffs Argentina needs to issue bonds. We were excited and positive because it means Argentina will go current on the securities that we own,” he said.

Herald with DyN, Reuters