Argentina Intends To Sell Its USD 4 Billion Stock Holdings

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Includes: BFR, BMA, CRESY, EDN, GGAL, IRCP, IRS, PAM, PZE, TEO, TGS
by: Jaime Campo
Summary

Argentina's National Pension Fund owns about USD 4 billion in US traded companies.

Government officials have suggested the need to sell these holdings in the near future.

Stakes in some specific stocks are very significant. Such is the case of Banco Macro (BMA), where the pension fund owns 31.50% of equity.

Liquidating these holdings can have a huge impact on thinly traded stocks if not handled properly.

In 2008, Argentina's government nationalized all of the private pension funds in the country and created a national pension fund to manage these equity and debt holdings. The ¨Fondo de Garantía de Sustentabilidad¨ (FGS) was born. Up to 2008, private pension funds were the most relevant players in domestic financial markets and nationalization resulted in the Government controlling relevant stakes in many publicly traded companies in Argentina. At the same time, Congress passed a bill forbidding the FGS from selling these equity holdings.

In late 2015, a new pro business government took office with the promise of less intervention in private companies. With the intention of fulfilling this promise and motivated by the need of cash to pay pension liabilities, several top government officials have suggested the intention to sell these equity holdings after modifying the bill. Some officials have spoken of a short term liquidation while others have preferred not to speak about timing. This has generated a great deal of uncertainty in the domestic market, which has translated into Argentina ADRs trading in US markets. If not managed properly, the sale of significant stakes in thinly traded stocks can have a huge impact on prices.

FGS - US Traded Equity Holdings as of 6/7/2015
Company % of outstanding equity owned by FGS Market Value (USD Million)
Banco Macro (NYSE:BMA) 31.5% 1,260
Edenor (NYSE:EDN) 26.8% 92
Telecom Argentina (NYSE:TEO) 24.9% 460
Transportadora de Gas del Sur (NYSE:TGS) 23.1% 116
Pampa Energia (NYSE:PAM) 23.2% 390
Grupo Financiero Galicia (NASDAQ:GGAL) 20.3% 620
Petrobras Energia (NYSE:PZE) 11.8% 150
BBVA Banco Francés (NYSE:BFR) 7.9% 290
IRSA (NYSE:IRS) 4.5% 420
Cresud (NASDAQ:CRESY) 3.6% 240
Irsa Commercial Properties (NASDAQ:IRCP) (formerly Alto Palermo SA) 1.4% 160
Total 4,198

Relevant names such as Banco Macro, Pampa Energía and Grupo Financiero Galicia, which are amongst the most traded Argentina ADRs in US markets, are heavily owned by the FGS. Both the ADR and domestic markets for most of these stocks are characterized by the lack of liquidity and market depth.

FGS - US Traded Equity Holdings As Of 6/7/2016
Company ADR 90-day average volume (USD thousands) 30-day average volume at Argentina stock exchange (ARS Million) # of days needed to liquidate position in ARS.
Banco Macro 126 8.9 1,982
Edenor 35 2.5 515
Telecom Argentina 84 2.8 2,300
TGS 72 0.4 4,060
Pampa Energia 338 14.3 382
Grupo Financiero Galicia 303 12.5 694
Petrobras Energia 157 0.9 2,333
Banco Frances 116 7.6 534
IRSA 78 0.5 11,760
Cresud 160 25.4 132
ICRP 3 0.1 22,400

One need not be an experienced emerging market investor to notice that liquidating these holdings in the market will be practically impossible for the FGS. None of these positions can be sold in the market without destroying prices. However, government officials do not seem to be worried about this and keep suggesting the intention to sell all equity holdings in the FGS.

Plan B

This situation leads us to believe that FGS officials (many of them former Wall Street investment bankers) must currently be pitching its holdings to foreign pension and hedge funds in order to find direct buyers for these stakes.

Given that MSCI still ranks Argentina as a frontier market and the country had to pay a 7.5% yield on its 10 year bond in the recent record breaking offering, potential bidders for the equity will probably expect favourable terms on these deals, probably negotiating below current market prices.

We expect to see closing on several of these transactions during the next twelve months. The terms of these deals and the effect on market prices is harder to predict, as FGS will probably be a motivated seller.

Until government officials clarify FGS's strategy and uncertainty over this issue dissipates, we advice investors to proceed with caution over these stocks.

Disclosure: I am/we are long CRESY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.