Bass Sees Argentine Rally Overdone With Talks Drawn Out

The rally in Argentine bonds is overdone to hedge-fund manager Kyle Bass, who says prices will be volatile as the nation seeks an accord this month with holders of defaulted debt.

Bass, whose Dallas-based Hayman Capital Management LP bought Argentina’s restructured securities last year, says settlement talks with investors including billionaire Paul Singer’s Elliott Management Corp. will be complicated. The government’s benchmark dollar bonds due 2033 slumped today, paring the advance that had sent their prices to a three-year high last week.

“The recent price rise is overly optimistic given the inputs and constraints surrounding a possible settlement,” Bass, who didn’t comment on his current investment position, said in an e-mailed response to questions. “There are so many different avenues these negotiations could end up traveling down that a one-way move higher seems unlikely.”

Argentina risks a default on its performing bonds when a deadline to make an interest payment expires at the end of this month. Elliott won a court order that forbids the country from servicing the debt before it makes a $1.5 billion payment to holders of securities Argentina defaulted on in 2001. The so-called holdout creditors have said they’re open to talks and would accept cash and bonds as part of a settlement.

While representatives of Elliott and Argentina met separately on July 11 with a court-appointed mediator in Manhattan, no direct discussions have taken place almost a month after the U.S. Supreme Court declined to hear Argentina’s appeal in the case.

Bonds Slip

Bass came to prominence for successful bets against subprime mortgages before the U.S. financial crisis. While the world’s largest banks wrote off more than $80 billion in subprime losses, Bass and others racked up billions in profit.

Dollar bonds due 2033, whose payment was blocked by a U.S. judge on June 27, fell 2.7 cents on the dollar today to 89.71 cents at 2:42 p.m. in Buenos Aires, according to prices compiled by Bloomberg.

“We have not seen any indication that Argentina is serious about even beginning a negotiation,” NML Capital, a unit of Elliott, said in a statement after the meetings.

The legal battle stems from Argentina’s record $95 billion default in 2001. The nation restructured about 92 percent of the debt in 2005 and 2010 by imposing discounts of about 70 percent. Creditors including Elliott and Aurelius Capital Management LP shunned the debt swaps to seek better terms through litigation.

Next Crisis

Argentine officials told the mediator that a delay on the orders is needed for direct talks to take place. A settlement risks triggering as much as $15 billion in additional claims from other bondholders, the Economy Ministry said in a July 11 statement.

While Elliott has said that it may be willing to support Argentina’s request to delay the orders if there’s sufficient progress in the talks, Aurelius said today the nation is “wholly undeserving” of such a stay.

Aurelius “has done everything it can to negotiate with the government of Argentina, to no avail,” the fund said in an e-mailed statement. “Absent a deal, Argentina’s next sovereign debt crisis will start on July 30. There is still time to avoid that outcome, but only if the Argentine government commences serious discussions with us immediately.”

‘Absolutely Certain’

The country’s negotiations with bondholders will succeed, Mario Blejer, vice president of Buenos Aires-based Banco Hipotecario SA and a former president of Argentina’s central bank, said. Blejer said in an interview on Bloomberg TV today he’s “absolutely certain” there will be no default at the end of the month as the government is determined to reach an accord that will allow it to access overseas capital markets.

Holdouts that weren’t involved in Elliott’s lawsuit have formed an ad hoc creditor group, according to legal adviser Bingham McCutchen LLP. The group holds a “material amount” of the defaulted securities and is seeking to advance its rights amid Argentina’s talks with Elliott.

A settlement may trigger a clause in the restructured bonds that obliges the government to extend any voluntarily improved offer made on defaulted debt before Dec. 31 to holders of restructured debt.

“If I were the Argentine government, I would make all participants believe that I was willing to push everyone over the proverbial cliff at the end of July to improve my negotiating position,” Bass wrote. “I expect fireworks and volatility over the next two weeks or so.”

Before it's here, it's on the Bloomberg Terminal.