Singer Upends Bonds as Default Endgame Nears in Argentina

Billionaire hedge-fund manager Paul Singer is roiling Argentina’s bondholders as he steps up pressure on the nation to repay holdout creditors from its $95 billion default in 2001.

Yields on Argentina’s dollar-denominated bonds due on 2017 have jumped 50 basis points, or 0.5 percentage point, to 15.43 percent since Feb. 11, when a unit of Singer’s Elliott Management Corp. won approval from U.S. District Court Judge Thomas Griesa to demand information on the nation’s assets held at state-owned Banco de la Nacion Argentina. Average yields for Latin American bonds rose 10 basis points to 5.48 percent in the same period, according to JPMorgan Chase & Co.

The ruling comes two weeks before a U.S. appeals court convenes to decide whether to uphold Griesa’s Nov. 21 decision requiring President Cristina Fernandez de Kirchner to repay in full Elliott’s NML Capital Ltd. and other holders of defaulted bonds that rejected earlier debt swaps at about 30 cents on the dollar. Singer seized an Argentine navy vessel in Ghana in October and tried to freeze central bank funds held in New York in 2010 as part of his decade-long attempt to confiscate assets in the face of Argentina’s refusal to pay back the holdouts.

Griesa’s decision, “made the market pay close attention to the case after pretty much ignoring it for the past few years,” said Jorge Piedrahita, the chief executive officer of Torino Capital LLC, a brokerage that specializes in emerging-market debt, in a telephone interview from New York. “So this recent ruling with Banco de la Nacion becomes more relevant. It’s one more step in a trend where NML is getting more aggressive in its demands while Argentina becomes weaker.”

Unresolved Litigation

Peter Truell, a spokesman for New York-based Elliott, declined to comment on the Banco de la Nacion ruling. Norma Madeo, a spokeswoman at the Economy Ministry, and press officials at the Buenos Aires-based bank and the presidential palace didn’t respond to e-mail messages from Bloomberg seeking comment on the ruling.

Piedrahita recommended investors sell Argentine bonds in October, after being bullish on the debt in June, as a U.S. appeals court upholding Griesa’s Feb. 23 ruling that Argentina must pay so-called holdouts increased the probability of default. His firm also hired attorneys to receive legal counsel, he said.

Argentina’s unresolved litigation is pushing up government bond yields to the highest in major emerging markets, according to Piedrahita.

Yields on Argentine government bonds average 13.2 percent, versus 9.2 percent for Venezuela and 3.8 percent in Brazil, according to JPMorgan.

Borrowing Costs

Argentine debt securities due 2017, which were issued in the 2010 restructuring and governed by New York law, surged to a record 19.7 percent after Griesa’s Nov. 21 ruling that the government had to pay so-called holdout creditors when it made its next debt payment in December. An appeals court, which delayed the ruling a week later, will reconvene on Feb. 27.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries fell 14 basis points to 1,079 basis points at 1:20 p.m. in New York, according to JPMorgan’s EMBI Global index.

The cost of insuring Argentine bonds against default for five years with credit-default swaps rose 15 basis points to 2,324 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to comply with debt agreements.

‘Alter Ego’

Griesa, 82, said Elliott’s NML can file a subpoena requiring BNA, as the bank is known, to produce documents “relating to any assets or accounts maintained at BNA by Argentina or for Argentina’s benefit, any debts owed by BNA to Argentina and transfers into or out of Argentina’s accounts.”

NML is seeking more information on the government’s assets outside Argentina as part of its attempt to obtain repayment on its debt, according to Arturo Porzecanski, a professor of international economic policy at American University in Washington. In 2011 court testimony, he supported the statement that BNA is an “alter ego” of the Argentine government.

“I’m not going to be naive and say that the discovery is just for the sake of learning how the payment process works,” he said by telephone from Washington. “The ultimate purpose is to obtain money that belongs to the government of Argentina. It’s well-known that the government has used BNA in the past to pay bills, move money and to operate.”

Financial Agent

BNA has offices in New York, Miami, Panama, Chile, Bolivia, Paraguay, Uruguay, Venezuela and Spain, according to its website.

Central bank notes, and government loans and bonds accounted for 44.7 percent of BNA’s assets, or 89.6 billion pesos ($17.9 billion) as of September, according to a Nov. 30 Fitch Ratings report. Deposits from the government and state agencies corresponded to 55.1 percent of the bank’s liabilities, or 32 billion pesos, according to Fitch.

One of the bank’s “main functions is to act as a financial agent for the government and as such, receives government deposits and makes payments for and on behalf of the nation,” wrote Fitch analysts Maria Fernanda Lopez and Dario Logiodice in a September report.

The risk that bondholders face from Singer’s lawsuit has already been reflected in the price of the notes, according to Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc. in New York.

“You start to be immune to these headlines because they are constant,” she said by telephone from New York. “It’s a fiscal skeleton that eventually could amount to something important but doesn’t seem to be an imminent risk.”

Toxic Assets

NML and other hedge funds including EM Ltd., which is run by billionaire Kenneth Dart, are seeking payment on bonds that weren’t swapped in two restructurings in 2005 and 2010. Investors owning about 94 percent of defaulted bonds accepted the offers of 30 cents on the dollar.

The funds have tried to seize assets from Argentina’s national pensions fund and state-owned telecommunications and energy companies, according to Eugenio Bruno, a lawyer at Buenos Aires-based law firm Estudio Garrido. They also tried to ground the Tango 01 plane during a maintenance trip to the U.S.

Fernandez, who spent $880,000 to rent a jet for a trip to Cuba and Asia last month to avoid a repeat of the Ghanaian navy ship incident, has vowed never to pay investors she calls “vultures.”

“By disregarding courts and isolating itself from the international community, Argentina has pushed away foreign investment in the past 10 years,” Torino’s Piedrahita said. “Argentine assets are viewed as toxic. We’re staying away.”

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