Argentina Bust Lures Investors After 200 Years of DefaultsBoris Korby and Katia Porzecanski
Kyle Bass says there’s still money to be made lending to Argentina, a deadbeat country with few peers in history. The hedge-fund manager is the latest example of international investors pursuing riches where crises over 200 years ruined most of its citizens.
The South American nation has stiffed creditors seven times since independence from Spain in 1816, and following the latest default, in 2001, Argentina has yet to work out a settlement with all its financiers. Nevertheless, Bass said he bought Argentine bonds at 55 cents on the dollar last year and has no plans to sell even as global investors say there’s an 86 percent chance Argentina will quit paying in the next five years.
“There’s huge opportunity in these bonds,” said Bass, who manages about $2 billion for Dallas-based Hayman Capital Management LP. “I know you can’t see that today, but today’s the time to be thinking about it.”
Argentina boasts shale oil and bonds that pay about triple the average of emerging countries relative to benchmark Treasuries. That’s enticed investors such as Spanish oil company Repsol SA, which lost billions, and U.S. investment firm Franklin Resources Inc., which hasn’t. Now that Argentina devalued its currency to stem a loss in reserves amid the region’s second-fastest inflation, triggering the worst bond losses among 60 developing countries, investors appear to be in for another trip on one of the longest-running financial roller-coasters in the world.
“In the last 100 years, Argentina has gone from being one of the darlings of foreign investors to being one of the scourges,” Walter Molano, author of “In The Land of Silver: 200 Years of Argentine Political-Economic Development,” said in a phone interview from Greenwich, Connecticut. “And it’s happened on several occasions. The outlook for Argentina is a difficult one. They’ve really made the economy into a mess.”
Argentina’s relative economic standing has eroded. It ranked seventh on a list of the wealthiest nations per capita in 1908, according to data compiled by the Maddison Project. By 2012 it had slipped to No. 55, behind Venezuela, Kazakhstan and Equatorial Guinea, among others, according to the World Bank. The country has been sued in the World Bank’s arbitration court by more investors and companies than any other, from Munich-based Siemens AG to Paris-based Total SA and AES Corp. of Arlington, Virginia.
The country first roiled international markets in 1827 and then again in 1890, when a poor wheat harvest in the pampas and a coup in the capital Buenos Aires led to a default that hurt British investors and forced the Bank of England to bail out Baring Brothers & Co. bank. The ensuing global panic allowed financier J. Pierpont Morgan to expand his banking empire into Latin America, according to Ron Chernow’s 2010 book, “The House of Morgan.”
After two Argentine defaults, in 1982 and 1989, Citicorp, the predecessor to Citigroup Inc., swapped some of the near-worthless debt it held for stakes in state-run companies. In the early 1990s, as Argentina tamed hyperinflation, pegged the peso to the dollar and began selling off the companies, the value of those stakes soared, generating hundreds of millions of dollars in profits for the bank and clients including George Soros.
The country’s savers didn’t do as well. Argentina forced them in 1989 to exchange bank certificates of deposit for 10-year bonds.
After Argentina quit making payments on $95 billion of debt in 2001, Citigroup lost $2.3 billion, more than seven times the initial estimate that executives reported to then-Chief Executive Officer Sanford I. Weill, according to Monica Langley’s 2003 book, “Tearing Down the Walls.”
The 2001 crisis once again made savers into losers. To stop a run on bank deposits, Argentina froze savings accounts, a measure dubbed the “corralito,” sparking violence that killed at least 27 people. Early the next year, the government forced banks to convert dollar-denominated deposits into pesos at a rate of 1.4 pesos per dollar. Within six months the U.S. currency traded as high as 3.86 pesos.
The default robbed retirees such as Oscar Secco of their life savings. Secco, a grandfather of seven, was granted a judgment for more than $1 million in 2006, but remains unpaid.
“Our country looks bad,” Secco said in a 2013 interview, “and not just to us.”
The 2001 default triggered Argentina’s deepest recession. Almost 100 companies stopped payments on their obligations after being left with dollar-denominated debt and revenue in pesos. Investments by private-equity firms including Blackstone Group LP were nearly wiped out.
“The country is a serial defaulter,” said Peter Lannigan, a managing director at broker-dealer CRT Capital Group LLC in Stamford, Connecticut, who’s been following emerging markets for 20 years. “This is their history.”
The default was an opportunity for billionaire hedge-fund manager Paul Singer to book a seat on Argentina’s wild ride. Singer, 69, the white-bearded founder of New York-based Elliott Management Corp., bought up Argentine notes for a discount and sued for full repayment starting in 2003. It was to be a reprise of Elliott’s 2000 success with Peruvian debt. The Andean nation paid the firm $58 million to settle a three-year dispute over defaulted bonds. In that case, Elliott blocked a Peru debt payment with a court order, prompting the country to settle to avoid defaulting on an $80 million interest payment.
With Argentina, Singer has little to show for his decade-long efforts beyond millions of dollars in legal fees paid to Gibson, Dunn & Crutcher LLP and Dechert LLP. While he has won claims to more than $1 billion in U.S. courts, Argentina has refused to pay.
In a bid to collect, the hedge fund has tried seizing government assets, including a naval vessel docked in Ghana and weapons stored in U.S. warehouses. President Cristina Fernandez de Kirchner rented a private jet for a state trip to Indonesia last year rather than risk losing her presidential plane, Tango 01, to unpaid debt holders.
Fernandez, who succeeded her late husband in 2007, says the holdout creditors are “vultures” looking to provoke another default. This month, Argentina said it will ask the U.S. Supreme Court to hear an appeal of an order blocking the nation from paying holders of restructured bonds before Elliott is paid in full. Fernandez has said she won’t obey the order, prompting renewed concerns the country will default.
Alfredo Scoccimarro, a spokesman for the president, didn’t reply to phone and e-mail requests seeking comment.
The legal dispute has prevented Argentina from borrowing outside the country, starving the government of hard currency that could have helped avert the current crisis. Foreign reserves, at a seven-year low of $28.1 billion, better enable the country to manage shocks, strengthen its own currency and pay off debt. Without international borrowing, Argentina taps the central bank’s supply of dollars to repay existing bonds and loans in exchange for a long-dated note that pays next to nothing in interest.
Argentina’s unwillingness to accommodate investors amid the economic turmoil robbed the nation of a $5.9 billion potash venture last year. Vale SA, the world’s largest iron ore producer, mothballed the project after the government refused to give the company tax breaks as inflation, currency declines and demands from provinces sent project costs soaring. The Rio de Janeiro-based company had spent $2.2 billion and completed 45 percent of the project before scrapping it. Vale said it has no plans to resume construction.
After devaluing the currency by the most in 12 years on Jan. 23, Argentina is trying to boost peso demand as annual inflation soars beyond 28 percent, pushing up deposit rates to 24.6 percent last week. The peso is down 38 percent in the last 12 months. Only Iran’s rial, buffeted by international sanctions, and Syria’s pound, crushed by civil war, have declined more.
Credit-default swaps -- insurance against a country or firm defaulting -- show that investors are betting there’s an 86 percent chance of Argentina halting debt payments over the next five years, the highest among all countries tracked by Bloomberg. The securities have surged 1,168 basis points this year to 2,806 at 2:00 p.m. in New York, the highest in the world, according to CMA data.
Since last month’s devaluation, the country’s dollar-denominated debt has tumbled the most of 60 developing nations tracked by JPMorgan Chase & Co. Prices on benchmark dollar bonds due 2033 have declined to 61 cents on the dollar, sending yields to close to 15 percent, part of an emerging-market rout that has stretched from Turkey to South Africa. The debt yields 10.85 percentage points over Treasuries compared with the 3.6 percentage point average spread for emerging-market dollar bonds, according to JPMorgan.
Seven years ago, the notes, which were issued as part of the restructuring following the 2001 default, traded as high as 117 cents as a three-fold surge in prices for the country’s soybean and wheat exports helped the economy rebound.
Argentine officials, searching for a sweetener to a restructuring that imposed losses of 70 percent, added warrants to their bonds that would make payments based on economic growth. Coupon payments on the securities are triggered when the economy expands beyond a certain threshold -- the more Argentina grows, the bigger the payment is. Most Wall Street firms assigned them a value of close to zero.
It turned out to be a cash cow for investors such as Franklin Resources’s Michael Hasenstab, who was named Top Global Bond Fund Manager in 2010 by Bloomberg Markets magazine. He began buying the dollar-based warrants for his Franklin Templeton funds in 2006, and had acquired 14 percent of all the securities by August 2013. As a worldwide commodities rally stoked growth, the warrants returned 43 percent annually from 2006 through 2013.
Stacey Johnston Coleman, a spokeswoman for San Mateo, California-based Franklin, declined to comment on individual holdings.
“If you can stomach the volatility and actually play it, you make a huge amount of money,” said Simon Nocera, a former economist the International Monetary Fund who’s now chief investment officer at Lumen Advisors LLC in San Francisco. He said he’s limited his recent investments in the country to the purchase of shares in a bank. “You’ve got to go into very, very deep value,” he said.
Repsol paid more than $15 billion for YPF SA, Argentina’s largest oil producer, in 1999. The deal quadrupled Repsol’s oil reserves, and the Madrid-based company would go on to announce the discovery of the world’s second-largest shale-oil field in southern Argentina in 2011. Less than a year later, Fernandez seized 51 percent of YPF from Repsol, saying the Spanish company failed to invest enough to prevent the country’s oil production from declining. Repsol and the government began negotiating compensation for YPF in November. Repsol has refused any deal that would require it to invest in Argentina again.
“The impact of the government’s approach to investors and contracts has been clear and detrimental,” Elliott, Singer’s firm, wrote in a Jan. 27 letter to investors obtained by Bloomberg News. “Investors have no idea what policy is lurking down the pike to limit profits, restrict dividends or simply eviscerate contracts.”
Bass, who profited by betting against U.S. mortgages in 2007, said he thinks Argentina will find a way to pay bondholders even if the U.S. Supreme Court rules in Singer’s favor. He doesn’t think the country is looking to saddle creditors with losses an eighth time.
In a better scenario, he said, the shale-oil field is developed and the country reaches a settlement with holdout debt owners such as Singer, spurring a rally that would benefit Argentina and make him money. The bonds he bought at 55 cents jumped to as high as 74 cents in December before plunging again.
“I think in the next year or two, really interesting things will happen,” Bass said. “It’s the single most interesting country to contemplate investment in.”