Singer Denial Failing to Quell Win-Win Charge: Argentina Credit

Billionaire Paul Singer has denied he owns credit-default swaps that would allow him to profit if Argentina shirks a court order requiring it pay him in full and halts payments. That hasn’t stopped Argentina from repeating the claim as its bond risk soars to the highest in the world.

Economy Minister Hernan Lorenzino said March 30 that the “sole” purpose of Singer’s legal dispute with Argentina over its record $95 billion default in 2001 is to make money from his swap holdings, a month after his NML Capital Ltd. fund said in a court hearing it doesn’t own the contracts. Argentina and holders of restructured bonds have also said in filings in the U.S. Court of Appeals in New York that Singer’s ownership of swaps is an incentive for his fund to pursue litigation that may trigger a default or an increase in the contracts’ prices.

Argentina has accused Singer of owning the contracts at least three times to show the court he has motives other than full repayment on his holdings. Anna Gelpern, a law professor at American University, says the argument will fail to sway the court because Argentina can’t prove Singer owns the swaps or that the contracts represent a conflict of interest even if he did. The cost of protecting Argentine debt against losses for five years has doubled to 22.93 percent since a court ruled the nation must pay defaulted-debt holders including Singer Oct. 26.

‘Red Herring’

“These allegations are to suggest that NML isn’t entitled to equitable remedy because they are engaged in some kind of foul play,” Gelpern said in a telephone interview from Washington. “The idea being that judges won’t rule in favor of a party with unclean hands. It’s only a red herring because they would have to do a lot of fact finding and I don’t think they’ll go there. It would take a lot to educate the court on this and its relevance to the case.”

Peter Truell, a spokesman at New York-based hedge fund Elliot Management Corp., which owns NML, declined to comment on whether the fund owns Argentine credit-default swaps.

U.S. appeals court Judge Rosemary Pooler asked Theodore Olson, NML’s attorney, in a Feb. 27 court hearing if the fund owns the swaps.

“I don’t know that that’s true,” Olson said. “I’m informed it isn’t true. But if it was true, it would be utterly irrelevant.”

Press officials at the economy ministry referred Bloomberg News to Lorenzino’s latest statements when asked to comment on NML’s alleged holdings of the swaps.

‘Attacking Argentina’

“The sole purpose of this -- besides attacking Argentina politically -- is another business that has nothing to do with the country, and has already been denounced by the president, the issue of derivatives, default insurance” in which “the vulture funds are involved,” Lorenzino said March 30.

Argentina also raised the issue in a March 29 court filing in which it proposed a plan to pay holders of defaulted debt.

“NML is also reportedly seeking to gain from the threat that the injunctions pose to Argentina’s debt service,” according the filing.

The cost to protect against Argentine debt with five-year swaps soared to as high as 3,379 basis points, or 33.79 percent, after the Feb. 27 hearing. It fell 84 basis points yesterday to 2,293, implying an 81 percent probability of default. Argentina is more likely to renege on payments than any country in the world, according to data compiled by CMA Ltd.

Won’t Pay

A swaps payout may be triggered if Argentina fails to pay any principal or interest on a restructured security for more than 30 days after payment is due, according to International Swaps & Derivatives Association.

Elliott Management is a member of the ISDA committee that determines if a default is triggered, according to the association’s website.

This is a “pretty severe conflict of interest,” Pooler said in the Feb. 27 hearing.

On Nov. 20, Lorenzino also said that NML’s seat on the committee increases its conflict of interest in the case.

Jonathan Blackman, an attorney for the South American nation, on Feb. 27 told a three-judge appeals panel in New York that Argentina would default on its restructured bonds if it’s forced to pay the holders of the defaulted debt.

NML owned swaps protecting $100 million of debt, exchange bondholders including BlackRock Inc. and Gramercy Funds Management LLC said in a Nov. 16 filing, citing arguments submitted in court by New York University law professor Stephen Choi, who refers to an article by newspaper Ambito Financiero.

An investor who held five-year swaps protecting $100 million of bonds would have made a profit of $34.7 million in less than five months as the upfront cost to buy the contracts rose to $52.4 million yesterday from $17.7 million on Oct. 25, the day before the U.S. court ruled Argentina must repay creditors including Singer, according to Bloomberg calculations.

‘Morally Wrong’

“The whole idea that there’s something morally wrong with them buying insurance just doesn’t fly,” said Russell Dallen, a Miami-based bond trader at Caracas Capital Markets. “The market is an amoral place. It’s about profit and loss.”

The net notional amount of Argentine swaps was $1.4 billion as of April 5, according to Depositary Trust & Clearing Co. That covers only about 14 percent of the country’s outstanding restructured dollar bonds.

Roberto Lavagna, a former Economy Minister from 2002 to 2005 who was in charge of the country’s first debt restructuring, says that if NML owns the swaps, it’s seeking to profit through improper methods.

“We all know what they’re like -- they’re dedicated to extorting countries,” he said. “They’re big speculators.”

‘Nothing Wrong’

The extra yield investors demand to own Argentine bonds instead of Treasuries narrowed 37 basis points, or 0.37 percentage point, to 1,182 basis points at 4:17 p.m. New York time, according to JPMorgan Chase & Co.’s EMBI Global index.

The peso fell 0.1 percent to 5.1438 per dollar.

Joaquin Almeyra, a trader at Bulltick Capital Markets, says the court won’t give much weight to Argentina’s allegation.

“The court dismissed this because NML has complete liberty of investing in CDS,” Almeyra said in a telephone interview from Miami. “They probably are covered and made money with their position. There’s nothing wrong with that.”

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