A new player has emerged in the Argentine debt drama. The question is why, and what does it mean?
Last week, Kenneth Dart, the billionaire heir to a Styrofoam cup fortune, jolted the Argentine debt negotiations by asking a New York judge to force Argentina to pay his bonds in full, too. Like Elliott Management’s Paul Singer, who has led a group of holdout bond investors trying to compel the Argentine government to reach a settlement with them, Dart is known as a “vulture investor” who has made a career of buying defaulted debt and then suing to be repaid at full value. Dart, it turns out, owns more defaulted Argentine bonds through his fund EM Ltd. than Singer’s fund NML Capital does, with $595 million worth to NML’s $503 million. Until now, though, he has remained quietly behind the scenes, as Singer and four other investors publicly battled the Argentine government through the U.S. court system. His sudden appearance shows that settling with Singer’s group of holdouts may not actually solve Argentina’s problems.
Argentina went into default on July 30 after a $539 million bond payment was blocked by a federal judge who said that the country can’t pay any of its exchange bondholders, who participated in the country’s two debt restructurings, until a group of holdout hedge funds are paid on their bonds. In addition to exacerbating what is already a difficult economic climate in Argentina, it has put the country’s leaders in something of a pickle. Argentine President Cristina Fernandez de Kirchner has made her battle against the American “vulture” hedge funds a central theme of her politics. To reverse course now, and pay Singer and the others what they want, would likely come at a high political cost. The goal then, from Argentina’s perspective, is to reach a resolution with the holdouts at the lowest price possible, and that can only be accomplished by diluting their leverage. Right now, their leverage is the fact that their actions pushed the country into default, so reducing it means finding a way to pay the exchange bondholders, which would get the country out of default, all without settling with the holdouts.
As of a week ago, the difference between what the holdouts were willing to accept and what Argentina was willing to pay had collapsed to a fraction of the $750 million or so that it was back in July. But Dart’s legal complaint draws attention to something that had been overlooked as the talks progressed: The so-called Gang of Five—the five holdouts at the center of Singer’s legal case: Singer’s NML Capital, Aurelius Capital, Blue Angel Capital, Oliphant, and a small group of retail investors—hold only about a quarter of all the New York bonds held by holdouts. In addition to Dart, there are approximately $2.4 billion worth of bonds out there that are governed by New York law and in the hands of other holdout investors. The minute Argentina settles with Singer’s group and the bondholder payments are allowed to flow through, all the other holdouts will likely rush forward to Judge Thomas Griesa’s court, demanding the same legal rulings and the same terms, which could block the payments again. The default could be cured temporarily, but then Argentina would be right back where it started.
That leaves only two routes to Argentina’s goals of restoring the blocked payments to its exchange bondholders; getting itself out of default; and, ideally, lowering the price it has to pay to all of its holdout investors. “To reduce the negotiation power of the holdouts, the payments on the exchange bonds must be placed beyond the reach of U.S. courts,” says Adam Lerrick, who led the negotiations on behalf of 40,000 European retail investors who formed Argentina’s largest international creditor in its 2005 debt restructuring. “The exchange bondholders can do this themselves by replacing their trustee and changing the payment process on their bonds. Or, Argentina could launch a new exchange offer where the new bonds are identical to the exchange bonds but the payment process is outside the U.S.”
In the first instance, in a plan Lerrick previously outlined, the exchange bondholders could band together and vote to remove the Bank of New York Mellon as their trustee and replace it and the rest of the bond payment process with financial institutions outside the U.S., where they would not be affected by Judge Griesa’s rulings. The payments could then continue to the exchange bondholders as planned, Argentina would no longer be in default, and it could then calmly turn to negotiations with the holdouts, without the threat of default hanging over it.
The second scenario involving a new exchange offer would likely happen if 25 percent of the exchange bondholders requested acceleration and immediate repayment in full of their bonds, an option that was triggered when Argentina went into default in August. An important deadline for holders to request accelerated repayment comes up on Oct. 30.
This is the game theory that is no doubt driving the decisions of Dart, Singer, and others with large stakes in the outcome. It’s unclear where it will lead, but an imminent settlement with Singer and Co. seems increasingly unlikely.