Why Argentina's Talking Again

When Argentina did its very creditor-unfriendly debt swap in 2005, a large number of bondholders held on to their defaulted paper rather than let the country buy it back for a pittance. The holdout strategy had after all paid enormous dividends in countries such as Peru, Brazil, Ecuador, and Uruguay. The stakes were much bigger in Argentina, of course, but a large number of aggressive creditors had no intention of letting Argentina off cheaply.

Their strategy didn’t work, and since the Argentine default “holdout” creditors, as they’re known, have received very short shrift in other countries too, like Ecuador and Liberia. And now it seems that they’re more than willing to capitulate in Argentina, tendering their bonds in a deal that’s worse than the original offer, plus offering to lend $1 billion in new money.

The new deal has been put together by Barclays (BCS) (f/k/a Lehman), which reportedly has found bondholders with $8 billion (face) of debt who are more than willing to pay all of Barclays’ fees and take pretty much exactly the same offer which they rejected in 2005. If the deal goes through, there will still be many billions of dollars’ worth of holdouts, but most of them will probably be judgment creditors rather than bondholders, which means that they’re basically ruling themselves out of any bond-swap exit.

The defaulted debt is trading in the high 20s right now; if and when this deal happens, it could go even higher. That’s because according to market rumor, the deal as it’s currently structured will have quite a tasty GDP warrant sweetener.

Of course, anybody who tendered into the original exchange, in 2005, got GDP warrants too, it’s true. But no one valued them at much more than zero at the time. It was only over the subsequent years of explosive growth in Argentina that the warrants started becoming extremely valuable to bondholders. This deal is existing bondholders’ chance to get in on that lucrative GDP-warrant action. And better yet, the Argentines even seem willing to give the holdouts all the old payouts on the GDP warrants, in the form of some kind of security — depending on the secondary-market value of those securities, that could be worth a lot of money. Argentina even is considering, or so I’m told, paying past-due interest on its repudiated Discount bonds all the way back to 2003, again in the form of new bonds.

What’s in it for Argentina? Well, for one thing, it gets $1 billion of new money from the bondholders represented by Barclays. But much more importantly, this deal, if it really does get up to somewhere in the $8-10 billion range, might well be enough to reopen conversations with the IMF, which is currently refusing to have anything to do with this deadbeat creditor.

Argentina’s running out of money, and although I’m sure a lot of investment banks might be willing to try and underwrite a new bond deal if this exchange goes well, I doubt there’s that much appetite out there for new Argentine global bonds, especially now they’re yielding less than they have done in years. The IMF I think would love to find an excuse to start working closely again with Argentina — which is, after all, a fully-fledged member of the G20. And in turn Argentina would love to have access to IMF liquidity. If it needs to do some kind of bond swap in order to make that happen, then so be it.

When Argentina did its very creditor-unfriendly debt swap in 2005, a large number of bondholders held on to their defaulted paper rather than let the country buy it back for a pittance. The holdout strategy had after all paid enormous dividends in countries such as Peru, Brazil, Ecuador, and Uruguay. The stakes were much bigger in Argentina, of course, but a large number of aggressive creditors had no intention of letting Argentina off cheaply.

Their strategy didn’t work, and since the Argentine default “holdout” creditors, as they’re known, have received very short shrift in other countries too, like Ecuador and Liberia. And now it seems that they’re more than willing to capitulate in Argentina, tendering their bonds in a deal that’s worse than the original offer, plus offering to lend $1 billion in new money.

Comments

[mrxg4:]

Great article. I'm from Argentina so I'm following the situation closely.

Quick editing note, though: the article's first two paragraphs are repeated again as the last two.

Sep 21 05:56 PM

[Mark Bern:]

Business loans go unfunded in this country. I understand that Barclays is not domiciled in the U.S., but it probably putting together a deal that includes some of the major US banks. They always try to spread the risk. But if BoA, WFC and Citi are involved it just makes me nervous. Why? Because these big banks have received so much taxpayer money and they could be doing much more to support domestic growth. If they can't pay back the TARP money, then maybe they shouldn't send that money overseas.

Sep 21 10:43 PM

[Mad Hedge F...:]

itx A number of readers have asked me to come up with a safe, high yielding investment in which to hide out in case the equity markets swoon again. That means they are looking for a security that offers a high fixed return, denominated in a strong currency that will benefit from future upgrades that will boost the principal over time. All of that is another name for the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY). The fund has 40% of its assets in bonds issued in Latin America and 31% in Asia, with the bulk of the maturities exceeding ten years. The two year old fund now boasts $340 million in market cap and pays a handy 6.42% dividend. This beats the daylights out of the nine basis points you currently earn for cash, the 3.40% yield on 10 year Treasuries, and still exceeds the 6.42% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single “A” US corporates. The big difference here is that foreign bonds are issued in strong foreign currencies instead of weak dollars, and have a rosy future of further credit upgrades to look forward to. It turns out that many emerging markets have little or no debt because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. With US government bond issuance going through the roof, the shoe is now on the other foot. A price appreciation of 125% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your “buy on dips” list.

Sep 21 11:31 PM

[southbeach:]

not really a relevant comment to the article, but a nice way to market your views and services.


On Sep 21 11:31 PM Mad Hedge Fund Trader wrote:

> itx A number of readers have asked me to come up with a safe, high
> yielding investment in which to hide out in case the equity markets
> swoon again. That means they are looking for a security that offers
> a high fixed return, denominated in a strong currency that will benefit
> from future upgrades that will boost the principal over time. All
> of that is another name for the Invesco PowerShares Emerging Market
> Sovereign Debt ETF (seekingalpha.com/symbo...). The fund
> has 40% of its assets in bonds issued in Latin America and 31% in
> Asia, with the bulk of the maturities exceeding ten years. The two
> year old fund now boasts $ 340</span> million in market cap and pays
> a handy 6.42% dividend. This beats the daylights out of the nine
> basis points you currently earn for cash, the 3.40% yield on 10 year
> Treasuries, and still exceeds the 6.42% dividend on the iShares Investment
> Grade Bond ETN (seekingalpha.com/symbo...), which buys predominantly
> single “A” US corporates. The big difference here is that foreign
> bonds are issued in strong foreign currencies instead of weak dollars,
> and have a rosy future of further credit upgrades to look forward
> to. It turns out that many emerging markets have little or no debt
> because until recently, investors thought their credit quality was
> too poor. No doubt a history of defaults in Brazil and Argentina
> in the seventies and eighties is at the back of their minds. With
> US government bond issuance going through the roof, the shoe is now
> on the other foot. A price appreciation of 125% over the past year
> tells you this is not exactly an undiscovered concept. Still, it
> is something to keep on your “buy on dips” list.

Sep 22 06:49 AM

[BRUCE E. W.:]

In times of famine,...even the devils eat flies. I wonder what W. C. Fields would have said of all this recapitulated arrogance in the high finance of global climate changes.

Sep 22 09:03 AM

[Harry Tuttle:]

So you are comparing the yield of this fund to cash? Nice analysis if you like to ignore risk. Just for starters, you have to believe in "decoupling." As we saw last year, this too is a "matter of faith".

caveat emptor


On Sep 21 11:31 PM Mad Hedge Fund Trader wrote:

> itx A number of readers have asked me to come up with a safe, high
> yielding investment in which to hide out in case the equity markets
> swoon again. That means they are looking for a security that offers
> a high fixed return, denominated in a strong currency that will benefit
> from future upgrades that will boost the principal over time. All
> of that is another name for the Invesco PowerShares Emerging Market
> Sovereign Debt ETF (seekingalpha.com/symbo...). The fund
> has 40% of its assets in bonds issued in Latin America and 31% in
> Asia, with the bulk of the maturities exceeding ten years. The two
> year old fund now boasts $340 million in market cap and pays a handy
> 6.42% dividend. This beats the daylights out of the nine basis points
> you currently earn for cash, the 3.40% yield on 10 year Treasuries,
> and still exceeds the 6.42% dividend on the iShares Investment Grade
> Bond ETN (seekingalpha.com/symbo...), which buys predominantly
> single “A” US corporates. The big difference here is that foreign
> bonds are issued in strong foreign currencies instead of weak dollars,
> and have a rosy future of further credit upgrades to look forward
> to. It turns out that many emerging markets have little or no debt
> because until recently, investors thought their credit quality was
> too poor. No doubt a history of defaults in Brazil and Argentina
> in the seventies and eighties is at the back of their minds. With
> US government bond issuance going through the roof, the shoe is now
> on the other foot. A price appreciation of 125% over the past year
> tells you this is not exactly an undiscovered concept. Still, it
> is something to keep on your “buy on dips” list.

Sep 22 09:06 AM

[Harry Tuttle:]

My understanding is that the deal has to be sold in Argentina as "worse than the original" for political reasons, so look for a complicated opaque structure.

If they can get wide participation (the outstanding debt is about $20B, so they seem to have about 40%) the country can return to the global markets which is what they are really looking for as opposed to money from the IMF which is perceived as politically tainted.

In any case, the lesson for Argentina, Ecuador, et al is that no matter what the current politico says, most countries eventually return to the financial markets (I think Cuba remains the only exception and they have the poverty to show it).

Sep 22 09:11 AM

[LKofEnglish:]

problems with the us dollar=invest in latin america? the last time we had this problem (the end of the 70's) that investment almost brought down Bank of America, no? And that's when American Banks and Bank America in particular were the top of the world. Look at 'em now. Apparently WITHOUT foreign borrowing and our lending to them our banks can't survive? That's scary.

Sep 23 09:08 AM