Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Argentina is selling its first international bond since a 2001 default caused the South American country to be locked out of capital markets and triggered a protracted legal battle with so-called vulture funds. 

As Finance Minister-cum-chief salesman Alfonso Prat-Gay tells people to call their brokers and reserve seats, he's also trying to slip a clause into the sale documents that would prevent a recurrence of such lawsuits. Bond buyers should beware.

Prat-Gay said in Washington that his country was exploring how it might institute rules that would limit investors' ability to litigate unless they held bonds during or prior to a default. That means hedge funds such as Elliott Management and Greylock Capital, which took the nation to court and were instrumental in helping smaller investors recover some losses, would have their hands mostly tied in the event of nonpayment. (Argentina's most recent default was as 2014). 

Such a clause would set a precedent, and would probably start featuring in indenture notes of past defaulters from Ecuador to Russia. Any smart finance minister would love to fence out vulture investors and have one less potential headache when the coffers are empty. It's particularly audacious of Prat-Gay given that, as of Thursday, there were still legal doubts over whether the country's landmark return to the bond markets would go ahead.

It wouldn't be surprising if the clause was inserted without investors even noticing. Bond documents can run to as many as 300 pages and buyers are often pressed to make a decision in a matter of days. Many of these calls end up being based on third-party opinions, such as from rating companies or analysts. Credit reports, however, rarely offer enough details on covenants and legalities.

Weak Protection
Investor safeguards have progressively deteriorated in Asia
Source: Moody's Investors Service

Chinese property developers offer a good example of how the practice of slipping weaker investor protection into documents can spread. Starting in 2013, companies began to offer high-yield bonds with lower interest-coverage ratios, which effectively allowed them to take on more debt without going into a technical default. Whenever a developer sold a new bond with a lower ratio, it asked investors in previous offerings to agree to the changed terms. Evergrande Real Estate Group, for one, did that at least twice. The company has increased its borrowings almost threefold since the end of 2013, leading to three downgrades. Its notes are now rated CCC+ by Standard & Poor's.

Growing Leniency
The number of Chinese companies asking investors to weaken their protection in bond documents more than doubled in 2015
Source: Bloomberg
Payback Time
China's developers more than doubled their debt as they got more concessions from investors
Source: Bloomberg

Finance ministers and chief financial officers can't be blamed for seeking the best terms they can get. It's up to investors to draw the line and require security for their money. They'd do well to send a clear message to Argentina and all other nations that have defaulted that they can't bar vultures.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net