If you’re confident that Argentina’s next president will resolve the nation’s seemingly intractable debt dispute, Bank of America Corp. has just the trade for you.
The bank recommends buying the country’s 8.75 percent dollar notes due in 2017. The securities have been in default since July 2014, when President Cristina Fernandez de Kirchner refused to comply with a U.S. court order that required Argentina to settle with its holdout creditors.
With the presidential election less than three months away, one of the most-pressing questions for investors has become whether Fernandez’s successor will end the nation’s isolation from international markets. To Bank of America’s Jane Brauer, the 2017 notes give traders the best shot at realizing the biggest returns.
“It’s got a high coupon, and it’s at a deep discount after you account for the past coupons embedded in the price,” the strategist said from New York. “If and when a settlement takes place, the market is expecting the government to resume payments and pay the past due coupons.”
In recent weeks, both front-runner Daniel Scioli, a member of Fernandez’s party, and leading opposition candidate Mauricio Macri have said they would seek to end the impasse. The $950 million notes due 2017 have jumped 3.2 percent this month to 99.84 cents on the dollar. Over the same span, government bonds in emerging markets have declined.
Argentina has missed two interest payments on the 2017 bonds, with the cash still on deposit at the country’s central bank.
In a radio interview Aug. 6, Scioli said the debt dispute should be resolved “once and for all” but under fair and sustainable conditions for the country.
Macri said July 7 that his government would “sit down to resolve the situation in the best possible way.”
“If you don’t settle, they’re going to cause you problems,” he said, referring to the creditors.
Bondholders led by billionaire Paul Singer rejected Argentina’s efforts to renegotiate its debt after the country’s $95 billion default in 2001 and instead won the right to full payment in court. A U.S. judge has barred the country from honoring debt it issued in its restructurings until it repays hedge funds including Singer’s Elliott Management.
Fernandez has called the creditors “vultures.”
While Argentina is willing to negotiate, hedge funds don’t want to talk under “fair, equal and legal” terms, said Jesica Rey, a spokeswoman at the Economy Ministry.
Stephen Spruiell, a spokesman for Elliott Management, didn’t reply to a message seeking comment on the timing or potential for an agreement.
A settlement is no guarantee because Congress has to approve any deal, according to Marco Santamaria, a money manager at AllianceBernstein.
“Any deal has to be palatable to Congress,” he said from New York. “It’s conceivable that there’s some brinkmanship approaching talks with holdouts and it could take some time to get resolution.”
Still, Bank of America isn’t alone in advising investors to take a chance on Argentina’s 2017 notes.
Morgan Stanley lifted its recommendation on Argentina’s debt to overweight in an Aug. 4 report, saying returns could reach 30 percent by the end of 2016. Strategist Robert Tancsa said the 2017 notes should outperform.
“The risk/reward appears most compelling” for the 2017 notes, he said.