Economy & Finance

Argentina bondholders play old waiting game in new year

NEW YORK (Reuters) – Investing in Argentine debt, since the country’s 2002 sovereign default, has never been for the faint of heart.

It’s a lesson that investors who accepted a settlement, some as many as 10 years ago, are re-learning now that they hold freshly defaulted debt.

Paul Singer, the founder of hedge fund Elliott Management, and one of the lead holdout creditors, told his investors in a letter dated Jan. 30 that the firm remains vigilant in its pursuit of a potentially huge windfall investment in unrestructured Argentine sovereign bonds.

“Maybe this is the year that our Argentina situation gets resolved, and maybe it is not,” Singer said in the letter, a copy of which was obtained by Reuters.

Elliot is one of a handful of deep-pocketed U.S. hedge funds that have sparred with Buenos Aires and won billions of dollars of so far pyrrhic court victories over the last dozen years. They rejected two prior restructurings.

As 2015 began, hopes ran high among investors, whether they be the hedge funds or holders of the defaulted restructured bonds due in 2033 and 2038, that the government’s excuse for not striking a deal was no longer an impediment.

Buenos Aires said the Rights Upon Future Offerings (RUFO) clause in the restructured debt blocked it from settling with the hedge funds on better terms than what it offered investors in the 2005 and 2010 exchanges.

The newly defaulted bonds have rallied in the last 12 months on expectations for a resolution, even one that may require a new president to settle.

At the end of last year there were 73 open-ended mutual fund firms globally holding defaulted 2033 and 2038 bonds, with a market value of approximately $748.9 million, according to the latest data from Thomson Reuters’ Lipper database and firm data.

Still, even with the expiration on Dec. 31 of RUFO, there is no deal.

FUNDS AND RALLY

The yield on the restructured 2033 Discount bond is down from a June high of 12.84 percent to 9.203 percent while the 2038 Par bond’s yield has fallen from 11 percent to 8.67 percent.

At this point, nearly all bondholders are not getting their coupon and/or principal payments. According to a BNP Paribas database, there were just under $4 billion worth of 2033 bonds and $5.3 billion of 2038 bonds outstanding at the end of January.

Hopes have shifted to October’s presidential election and potential regime change for progress toward an agreement. Investors appear content to wait as no group of creditors has organized a large enough voting bloc to formally demand an immediate repayment on the newly defaulted issues.

Dallas-based Highland Capital Management has the highest concentration of the 2033 and 2038 bonds in a single fund, its Global Allocation portfolio, at 23.7 percent as of the end of 2014, the firm said.

Overall, Highland holds $298 million worth of the 2033s and 2038s in two mutual funds. It also owns roughly $74.9 million in a closed-end fund called NexPoint Credit Strategies.

In total, the $373 million represents an allocation of 1.84 percent of Highland’s overall assets under management of more than $20 billion as of year-end 2014, the firm told Reuters.

Highland’s concentrated bet is based on the idea that a deal will finally get done this year at a price above the current market.

Below is a list of open-ended mutual funds with the highest allocations of defaulted 2033 and 2038 Argentine sovereign bonds as of year-end 2014, according to Lipper and fund company data.

Fund Name Domicile Allocation of 2033s

and 2038s per fund

Highland Global Allocation USA 23.72%

Fund

Highland Opportunistic USA 20.31%

Credit Fund

Nordea 1 – Emerging Market Luxembourg 5.77%

Bond BP USD

Eaton Vance Institutional USA 5.65%

Emerging Markets Debt Fd

Nordea Kehittyvat Finland 5.32%

Korkomarkkinat Kasvu