Even Distressed Argentine Utilities Buoyed by Election OptimismKatia Porzecanski and Camila Russo
The prospect of life after President Cristina Fernandez de Kirchner has propelled Argentina’s government bonds even in default. Now, that optimism is even sparking a rally in the country’s perennially distressed utilities.
Electricity and gas distributors based in the South American country have handed debt investors returns of 7.4 percent this year, more than double the average gain for the industry globally, according to data compiled by Bloomberg.
For bondholders of the utilities and the government, the thinking behind the trade is largely the same: The winner of presidential elections in October will undo the policies of Fernandez and her late husband and predecessor, Nestor Kirchner. That means, as it applies to power companies, dismantling decade-long price caps that have turned them into money losers seemingly always on the precipice of default.
“Prices are factoring in a lot of good news on the political front,” Ray Zucaro, who oversees $377 million million of assets including Argentine utility companies at SW Asset Management, said in an e-mail. “Without the ability to raise rates, these companies are living off the kindness of government subsidies.”
The government’s benchmark dollar bonds have soared 31 percent in the past year on speculation the successor to Fernandez, who’s barred from seeking a third straight term, will settle with disgruntled foreign creditors and resume debt payments that have been blocked by U.S. courts since June.
The nation’s securities due 2033, which went into default in July, rose 0.8 cent on the dollar to 104.6 cents at 11:22 a.m. in New York.
Fernandez has called bondholders including billionaire Paul Singer “vultures” for rejecting the terms of Argentina’s two debt restructurings after its 2001 default. The holdouts have won the right to full repayment in court.
Buenos Aires Mayor Mauricio Macri led a first-round poll carried out by Raul Aragon & Asociados that was released April 3. Macri had 28.5 percent of voter intention, followed by 27.7 percent for Province of Buenos Aires Governor Daniel Scioli and 17.6 percent for lawmaker Sergio Massa. Scioli led voter preference against Macri in a potential second round, the poll found.
In the wake of the country’s financial crisis 14 years ago, the government began imposing caps on prices for electricity, natural gas and oil to contain inflation.
Speculation that those policies will be reversed has caused bonds sold by transmission operator Cia de Transporte de Energia Electrica en Alta Tension Transener SA to gain 12.7 percent in 2015, the best return among the nation’s utilities. The 2022 notes issued by Edenor, Argentina’s largest electricity distributor, have returned 10.4 percent in that span.
The notes from Transener and Edenor still yield at least 10 percentage points more than U.S. Treasuries, above the threshold for distressed securities.
“Utilities seem to offer the greatest upside insofar as it is a heavily distorted industry,” Daniel Freifeld, co-founder of Callaway Capital Management LLC, said in an e-mail from Washington.
Still, investors may be overestimating how quickly the new government will be able to undo Fernandez’s policies, says Joaquin Almeyra, a fixed-income trader at Bulltick Capital Markets.
“The change in government is going to happen, and it will clearly be positive,” he said in an e-mail from Miami. “But it’s not magic. The fiscal distortions and imbalances that will remain in the economy after 12 years of this government are tremendous, and the cost to fix them will be expensive.”
Edenor has posted losses four out of the past five years as it has been unable to raise prices enough to keep up with soaring inflation. The Buenos Aires-based company may begin to pare losses later this year, when power rates that have been frozen since 2008 will be increased, according to Moody’s Investors Service. In the meantime, the government has said it will transfer funds to utilities to help shore up their finances.
“It’s not ideal because the consumers aren’t paying and the measure is still subject to revision, but it’s a slightly more serious signal about where rates are headed,” Daniela Cuan, an analyst at Moody’s, said by telephone from Buenos Aires.