JPMorgan Bets 46% Surge Not Done With Bond Buy: Argentina Credit

JPMorgan Chase & Co. is betting the world’s biggest bond gains are far from over.

The New York-based bank bought $3.25 billion of Argentine bonds from Repsol SA as a wager the notes will rally and hasn’t hedged them, according to a person with direct knowledge of the bank’s strategy. It paid $2.8 billion for the 10-year debt, or about 86.6 cents on the dollar, and will keep some of the bonds longer-term, said the person, who asked not to be identified because he wasn’t authorized to speak publicly about the matter.

Argentina’s bonds, rated seven levels below investment grade, have soared 46 percent in the past year, the most among emerging-market government debt, as the country repairs ties with the International Monetary Fund and seeks to stem a drop in the foreign reserves it uses to pay debt. The government gave the Bonar notes due in 2024 to Madrid-based Repsol as compensation after seizing 51 percent of YPF SA two years ago, as part of a package with a total face value of $5.32 billion.

“People were aching to be a part of the Argentine story,” Patrick Esteruelas, senior sovereign analyst at Emso Partners Ltd., which oversees about $2 billion, said in an interview in New York. “It’s a junk credit, but it’s a credit that people are evaluating as part of a broad convergence play.”

Repsol Deal

JPMorgan sold some of the notes and will keep some with the intent to sell at a profit, the person said, without giving amounts. Veronica Espinosa, a spokeswoman for the bank, declined to comment on the deal.

Daniel Pinto, who became the sole chief executive officer of JPMorgan’s Corporate and Investment Bank in March after 12 years of work in the bank’s emerging-markets business, is Argentine, according to the U.K.’s Companies House. A JPMorgan biography showed Pinto worked in the 1990s as head of sales for Chemical Bank in Buenos Aires, where he was responsible for clients in Argentina, Uruguay and Paraguay. Pinto declined to comment for this story.

Repsol sold the 2024 bonds to JPMorgan and agreed not to sell the remaining notes for seven days after the transaction closes, according to a May 9 regulatory filing.

JPMorgan sold some of the 2024 securities for about 86.75 cents on the dollar to at least two investment firms, according to two people familiar with the transactions. The 8.75 percent notes were trading late yesterday at 88.35 cents on the dollar, with a yield of 10.7 percent.

Fair Price

Given prices on other Argentine government bonds, the 2024 notes should be about 8 cents higher at 96.5 cents on the dollar with a yield of 9.4 percent, according to a May 12 report by Citigroup Inc. strategists Jeff Williams and Guillermo Mondino.

Argentina’s notes due in 2017 traded at 91.8 cents on the dollar with a 10.5 percent yield.

JPMorgan, which opened its first office in Buenos Aires in 1978, sold about half of the bonds, according to Michael Roche, a strategist at Seaport Global Holdings LLC, citing trades he’s observed. The country hasn’t issued international bonds since it defaulted on $95 billion of debt in 2001. It restructured 93 percent of the debt in swaps in 2005 and 2010.

“They’ve demonstrated that they’re able to access international capital markets,” Roche said in a telephone interview from New York. “We’re continuing to see a steady increase in the breadth of investors interested in getting exposure to Argentina.”

Regime Change

Joshua Rosner, managing director and bank analyst at Graham Fisher & Co., said JPMorgan is making a risky bet.

“They may be betting that the government will ultimately act rationally,” he said in a telephone interview from New York. “If they didn’t hedge it, and are holding this for their own portfolios, it’s a wildly risky thing to do especially given the statements and actions of the government.”

Since taking office in 2007, President Cristina Fernandez de Kirchner has also seized $24 billion of private pension funds and flagship airline Aerolineas Argentinas SA. The country still hasn’t settled claims with defaulted-debt creditors demanding full payment.

Fernandez’s efforts to mend ties with overseas creditors and the prospect of a new government after elections next year will spark further bond gains, Seaport Global’s Roche said.

Argentina revamped its economic data indexes earlier this year at the behest of the IMF, which had censured the country for inaccurate inflation and growth figures in 2013. It has also settled with five companies in the World Bank’s arbitration arm and is in negotiations with the Paris Club of creditors.

“Investors are pretty convinced that a new political force at the new elections will continue to normalize the country’s relations with international investors,” Roche said.

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