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Ex-Deutsche Bank Trader Bets UBS Call Is Wrong: Argentina Credit

President Cristina Fernandez de Kirchner
Since August President Cristina Fernandez de Kirchner, in a bid to stanch the biggest drop in reserves in 11 years, has settled arbitration disputes at the World Bank, revamped the country’s economic data at the request of the IMF and agreed to compensate Repsol SA for the expropriation of its stake in YPF SA. Photographer: Igor Russak/RIA Novosti via Getty Images

UBS AG and Jefferies Group LLC predict Argentina’s world-beating bond gains will fizzle. Former Deutsche Bank AG trader Luis Caputo is looking to bet as much as $300 million they’re wrong.

Caputo, 49, said he raised $30 million in the first week running Noctua International LLC’s Argentina fund and plans to reach the $300 million goal in three to six months as he seeks to capitalize on soaring demand for Argentine assets. The country’s bonds have returned 21 percent since August, more than any other nation tracked by Bloomberg indexes, when President Cristina Fernandez de Kirchner failed to win enough votes in a primary to seek a third term in next year’s election.

To Jorge Mariscal, the chief investment officer for emerging markets at UBS Wealth Management, the gains are unjustified as Argentina fails to tame inflation estimated at 37 percent or settle creditor claims from its $95 billion default. Caputo, former head of emerging-markets trading at Deutsche Bank before becoming CEO of its local unit, contends investors will profit as Argentina repairs relations with the International Monetary Fund and shores up its reserves.

“The government is making the necessary adjustments to rebuild trust and improve accounts,” Caputo, whose 11-year stint at Deutsche Bank ended in 2008, said in a telephone interview from Buenos Aires. “Foreign investors are starting to watch Argentina more closely, and when they realize its economic and financial position is a lot more solid than other emerging markets, stock and bond prices will continue correcting.”

Election Results

Yields on Argentina’s dollar-denominated bonds have plunged 1.5 percentage points since August to 10.76 percent, according to JPMorgan Chase & Co. The yield is still the highest in emerging markets after Ukraine and Venezuela.

The yield spread to U.S. Treasuries narrowed 15 basis points to 780 basis points at 2:45 p.m. New York time.

Fernandez’s coalition garnered the fewest votes since 2003 in the Aug. 11 primaries to choose contenders for mid-term congressional elections. The results ensured Fernandez’s presidency, which followed that of her late husband Nestor Kirchner in 2007, will come to an end in 2015.

Economy Ministry press official Jesica Rey didn’t respond to an e-mail message from Bloomberg News seeking comment.

Since August, Fernandez, in a bid to stanch the biggest drop in reserves in 11 years, has settled arbitration disputes at the World Bank, revamped the country’s economic data at the request of the IMF and agreed to compensate Repsol SA for the expropriation of its stake in YPF SA.

Fueling ‘Optimism’

“It’s what the market had been calling for, so it spurred a lot of optimism,” said Caputo, who was also head of Latin America debt trading at JPMorgan from 1994 to 1998.

Caputo, an Argentine, was also a director at Empresa Distribuidora & Comercializadora Norte SA, the nation’s biggest electricity distributor.

Ahmad Zuaiter, who was a money manager at Soros Fund Management from 2006 to 2011 before founding Dubai-based hedge fund Jadara Capital Partners Ltd., said in a telephone interview that he began buying Argentine bonds and American depositary receipts after the election results in August. He declined to provide additional details.

Investors are overly optimistic about Argentina, according to UBS’s Mariscal.

Singer Battle

“There’s still a long way to go,” he said in a telephone interview from New York. “The markets are anticipating great results while the root issues are far from being solved.”

Argentina’s fiscal deficit widened to 7.8 billion pesos ($971 million) in February from 526 million pesos a year earlier as spending rose 42.1 percent. Reserves, which the country has used since 2010 to pay debt, are hovering near a seven-year low at $27.8 billion.

Holdout creditors led by Elliott Management Corp.’s Paul Singer have won lower court rulings to be paid in full at the same time Argentina services its restructured debt. The effects of the ruling are on hold pending an appeal to the U.S. Supreme Court.

About 93 percent of creditors accepted losses of 70 percent in the restructurings in 2005 and 2010. Argentina has said paying holdouts in full could expose it to $15 billion of claims that would lead it to default again, while the court orders the country to pay $1.4 billion.

“It’s not the same risk-reward we had a year ago after impressive gains,” Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies, said by phone from New York. “We’ve seen most of the double-digit returns. Change has been minimal and investors seem to trade more on headlines than fundamentals.”

‘Significant Value’

Daniel Freifeld, who founded hedge fund Calloway Capital LLC last year after serving as a senior adviser to the U.S. State Department, said he’s betting Argentine bonds will continue to rally after he began investing in the securities in August.

“Argentina is one of the last markets that offers significant value across all assets,” he said in a telephone interview from Washington. “It’s a country with a set of eminently solvable problems. All of the fundamentals, from human capital to natural resources, infrastructure and relatively low level of social problems, combined with prices, makes it an attractive market.”

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