Bank of New York-Managed Fund Loses 51% on Argentina Default

Bank of New York Mellon Corp. said one of its Brazil-based investment funds wrote down more than half the value of its assets after recording losses on investments linked to Argentine government debt.

The Brasil Sovereign II Fundo de Investimento de Divida Externa FIDEX took a loss of 197.9 million reais ($87.2 million) on Aug. 1 after booking a provision on credit-linked notes tied to Argentine bonds, according to a regulatory filing yesterday by BNY Mellon DTVM, the bank’s Brazilian fund manager. The fund has just one investor and the identity is not public information, according to securities regulators.

Argentina last week failed to make a $539 million interest payment on its bonds, prompting Standard & Poor’s and Fitch Ratings to declare the country in default for the second time since 2001. The country has about $29 billion of overseas foreign-currency notes outstanding, and the International Swaps & Derivatives Association ruled last week that the failure to pay interest will trigger $1 billion of credit-default swaps.

“Due to the suspension of payment on foreign debt notes issued by Argentina backing the referred notes, and to the necessity to change its evaluation methodology of some credit-linked notes, provisions for losses have been made in its portfolio,” BNY Mellon DTVM said.

The fund that held the notes had 384.4 million reais worth of assets as of July 31, according to data available at the website of the Brazilian securities regulator. The value dropped about 52 percent to 185.5 million reais as of Aug. 1.

Court Case

The investment linked to Argentina’s sovereign debt was made in December 2011, when the fund was managed by Atlantica Administracao de Recursos Ltda., according to the filing. BNY’s Brazilian fund unit took over management in March 2012.

In August of that year, the U.S. Securities and Exchange Commission charged Fabrizio Neves, Atlantica’s owner at the time, with fraud for overcharging customers $36 million by using hidden fees on structured notes transactions. Neves and the SEC agreed to settle the dispute in February of this year, according to a statement from the U.S. regulator.

While Argentina deposited the interest due on overseas bonds with the trustee, which is also Bank of New York Mellon, the payment was blocked because of a legal dispute with creditors who refused to participate in earlier restructurings.

U.S. District Judge Thomas Griesa prohibited Argentina from making the payment until it settles unpaid debts owed to the so-called holdouts, led by billionaire hedge fund manager Paul Singer’s Elliott Management Corp.

Unlike current overseas bondholders, who agreed to provide debt relief to Argentina after its record $95 billion default in 2001, the holdouts sued in court for full repayment and won a $1.33 billion judgment from Griesa. The U.S. Supreme Court declined to hear Argentina’s appeal in the case in June, leaving that order intact.

After last-minute negotiations between Argentina and the holdouts failed to avert default on July 30, Griesa at an Aug. 1 hearing ordered the parties to continue talking.

To contact the reporters on this story: Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net; Paula Sambo in Sao Paulo at psambo@bloomberg.net; Francisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Bradley Keoun, Rita Nazareth

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