Economy

‘Vulture’ funds are once again looking closely at Argentina

19th September 2019

By Fermín Koop

‘Vulture’ funds are once again looking closely at Argentina

Distressed-debt investors and so-called “vulture” funds are once again setting their eyes in Argentina’s sovereign bonds, some of which are already trading at about 40 cents on the dollar.

The buyers, with an appetite for risk and financial shoulders to wait for payout, are expecting the market to go lower and then swoop in at about 30 cents, if they haven’t bought already.

These interested parties have two different strategies, experts believe. One is to purchase bonds to wring value out of the country’s distressed assets now that they are cheaper. The other, similar to what happened after the country’s 2001 default, is to play hard on future renegotiations, rejecting any haircuts or restructurings on the table and suing for full payment.

</p> <p>All bets are on, especially after the government’s decision to <a href="https://gettheessential.com/economy/2019/09/12/the-consequences-of-argentinas-selective-default-provinces-business-lecap-lecer-lelink-letes-leliqs-plan-bonex">postpone payments on short-term local notes</a> as part of a plan to <a href="https://gettheessential.com/economy/2019/08/29/debt-renegotiation-argentina-imf-foreign-bonds-local-law-imf-default">reprofile more than US$100 billion of debt</a> last month, half of which are bonds that expire in up to 10 years – which could be the way back in for the “vulture” funds.</p> <p>“Every time investors see a sovereign bond at default prices their radars turn on. The same applies to provincial and corporate debt. They are probably already purchasing Argentine bonds,” Sebastián Maril, head of Fin.Guru, said. “They want to benefit in the future using legal and not-so-legal strategies.”</p> <h2><strong>Cheap bonds</strong></h2> <p>Argentina’s sovereign century bonds, among the most traded, were sold last week at 48 cents on the dollar. Dollar-denominated notes due in 2048 changed hands at similar levels, while euro-denominated bonds due in 2028 and 2038 were slightly lower.</p> <p>Peso bonds have also lost almost half their value in dollar terms since President Mauricio Macri’s defeat in the primary election.</p> <p>Securities of Argentine provinces have also experienced a decline, with the ones from Chaco, La Rioja and Río Negro trading at less than 50 cents on the dollar. Provinces were among the most prolific issuers since Macri took office, with US$15 billion in provincial bonds now putting pressure.</p> <p>Overall, Argentine bonds are considered among the cheapest in the world, signaling that traders think Argentina’s government is close to defaulting on its obligations.</p> <h2><strong>Change in holders</strong></h2> <p>According to the Delphos consultancy agency, these are the prices at which bonds start to change hands.</p> <p>After being held by “real money” funds (such as pension or mutual funds, which are more liquid and hold more traditional instruments), Argentina’s debt is now starting to be purchased by more patient holders that can afford longer-term, riskier investments, such as hedge funds focused on distressed assets.</p> <p>As a general rule, these investors try to buy on the cheap after a steep fall in prices, expecting that they will eventually recover. The difference with the so-called “vultures” is that they are not looking into litigation as their strategy for profit.</p> <p>Sources from distressed funds told <em>The Essential</em> that there was definitely renewed interest into Argentine assets after the plunge in prices seen in August, and that a couple of actors in the sector were considering buying more.</p> <p>According to sources quoted by <a href="https://www.bloomberg.com/news/articles/2019-09-03/vulture-funds-circle-argentina-waiting-for-right-time-to-buy">Bloomberg</a>, “distressed debt investors will probably wait until Argentine bonds are well below expected recovery values before buying,”, as they believe “prices could drop to 20 cents on the dollar or lower.”</p> <p>“Their interest is feasible following the recent plunge of Argentine bonds and notes,” Hernán Letcher, economist and head of the Political Economic Center (CEPA), told <em>The Essential</em>. “If they haven’t bought yet, they will probably consider a purchase later if prices continue declining.”</p> <h2><strong>Recent &#8216;vulture&#8217; history</strong></h2> <p>Following the 2001 default, a fund controlled by Paul Singer’s Elliott Management took Argentina to court for full repayment instead of accepting the terms to which most creditors agreed. The gambit, which involved the attempted seizure of an Argentine frigate and <a href="https://www.wsj.com/articles/argentina-creditor-takes-defaulted-debt-battle-to-space-1395796016?tesla=y">two SpaceX contracts</a>, proved successful.</p> <p>More than a decade later, Elliott collected some US$2.4 billion from the country after striking a deal with Macri. The move helped to earn Elliott the title of &#8220;vulture fund,&#8221; implying that the firm was &#8220;preying&#8221; on Argentina at a time when the country was under economic pressure.</p> <p>The long-term legal battle led to the implementation of changes in the issuance of new bonds. Now, the holders of Argentine debt issued in the past few years are bound by collective-action clauses that will limit their ability to seek a settlement apart from the majority of investors.</p> <h2><strong>Limits to litigation</strong></h2> <p>If more than 75 percent of the bond holders accept the terms of a potential restructuring, the rest is forced to accept the agreement. This reduces the litigation risks, although it doesn’t fully eliminate the possibility.</p> <p>Back in 2001, 90 percent accepted the restructuring and the remaining 10 percent chose to take the case to court.</p> <p>“The characteristics of the bonds are different, but they are not bullet proof to the holdouts. The next government will have to work to stop history from repeating,” said Eric Ritonadale, chief economist at Econviews. “They could already be purchasing debt without us knowing it.”</p> <p>An economic adviser to presidential hopeful Alberto Fernández, who asked not to be named, said the reappearance of the “vulture” funds “can’t be ruled out” and agreed that despite the changes in the bonds the “vultures” could find a new way in.</p> <p>“Argentine assets are now owned by a small group of foreign investors. While this can facilitate the negotiation of a potential debt restructuring, it could also be problematic as a small group of people will make the decisions over the bonds and they could be influenced by the holdouts,” he said.</p> <p>

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Fermín Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires. He is editor at Diálogo Chino and co-founder of Claves 21.
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