Advent Claymore Convertibles: An Alternative to Argentine Bonds

Argentina is not given enough credit for its contributions to world culture. We all know about the tango, but did you know about tango-terapia, which helps overcome autism and depression by sexy dancing? Tango-terapia gives a legitimate function to the national dance.

It was in Buenos Aires that dog walking was invented, after people stopped going home for lunch. Fido could not be left all day without making a mess on the carpet, so trusted youths from the neighborhood were employed to walk the dog. For the unemployed, it certainly beat sorting people's garbage, another source of funds in B.A.

Now Cristina Fernandez, the Argentina Presidente, has worked out a new breakthrough for economics to go with the tango and the pooch-walkers: nationalizing private pension funds. The closely-regulated Argentina fund administration industry will be taken over by the state. Pension funds had been required to keep 60% of their assets in bonds (and allowed only a maximum of 40% in shares). Given the shortage of peso private sector bonds, in fact the FPPs have 55% of people's pension money in government debt.

If the state takes over the funds, it can write off the debt, the beleaguered Peronista president figured. She presented the measure as part of a piece with interventions in foreign markets to stave off the crisis. The Casa Rosada was only copying the White House and the Fed.

Unfortunately, the Bolsa and the bonds markets didn't agree. The stock market fell 11% on the news and the yield on bonds rose to 24% as their prices plummeted. Only hefty intervention kept the Argentine currency from falling too.

The good news is that after Argentina's last default, there are few foreign holders of Argie bonds, most of them investors who refused the derisory buyout of 2001.

We do not currently recommend any Argentine bonds. But for the record, we also do not recommend any U.S. T-bills yielding zero percent interest. You may as well put the money under your mattress. Here is an alternative.

We have a long relationship with F. Barry Nelson of Advent Capital here in New York, dating back to when he worked for Value Line. Barry is a specialist in convertible bonds. I own Advent Claymore Convertible Securities, a closed-end fund Barry manages, in my IRA account and I just added to my position based on news from Barry, below, and greed. I want to own more of this stock yielding a safe 13.17% and it goes ex dividend on Thursday.

In response to my nudging him about the fund's risks with auction rate preferred, Barry wrote back. I was hoping his fund would take out all ARP risk the way our Aberdeen bond funds did, but the situation is different and tougher for AVK.

Anyway, on Dec. 1., AVK announced its 5% partial ARP redemption plans. The rates being offered are ludicrous of course, but the auction is trying to lure institutional investors into abandonment of an even less lucrative way of holding cash, namely T-bills. I guess it doesn't want to flood the market.

Here is what Barry wrote:

Re the ARPs, we recently announced that we would redeem $13 million of our ARPs in AVK, which previously were $275 million. The challenge with the ARPs situation is finding favorable alternatives. Amidst a credit panic, obtaining leverage on any terms is difficult. The ARPs are technically perpetual preferreds and they carry an interest rate of 125 bp over LIBOR. Here's a table that I just copied from the Advent/Claymore website:

AUCTION MARKET PREFERRED SHARES	Claymore Comments on Auction-Rate Preferred Securities Market

Disclosure: I own 108 shares of AVX in my IRA. I also own shares in two Aberdeen bond funds, FAX and FCO.