Argentina Hands 135% Return to Bondholders Who Braved Crises

  • Boden bonds have outperformed 93% return in emerging markets
  • The $5.7 billion of debt sold after 2001 default mature Monday

Investors who bought Argentina’s bonds in the aftermath of its 2001 default and had the stomach to hold on for the next decade are about to be rewarded with a 135 percent return when the securities pay out next week, according to Bank of America Corp.

The $5.7 billion of 10-year notes will be paid off Monday, according to Economy Minister Axel Kicillof, handing investors more than the average 93 percent gain for emerging markets, after years of turmoil generated by lawsuits with creditors, a plummeting currency, soaring inflation and a government that allied itself with Hugo Chavez. When things looked diciest, Venezuela’s socialist president even stepped in to buy a portion of the notes to aide Argentina.

The bonds traded at 103 cents on the dollar Friday, from a low of 18 cents in 2008 and 69 cents just three years ago, when investors grew concerned the country was running out of dollars and would opt to repay its local debt with pesos.

``They’ve been a great investment for the brave''

Falling reserves kept prices on the notes below par until 2015, and holders suffered another scare this year when speculation mounted that payments would be curtailed by a legal dispute involving investors seeking repayment on defaulted bonds from 2001. But none of that came to pass.

‘Great Investment’

“They’ve been a great investment for the brave,” Andres Ronchietto, a money manager at Galileo Argentina SA, said from Buenos Aires. Ronchietto held the bonds until two months ago, when he sold them to buy other Argentine notes that mature in 2017 so that he can continue to hold a dollar-denominated asset with inflation estimated at 27 percent.

Argentina will offer a five-year dollar bond with an 8 percent coupon on Tuesday for those bondholders who wish to stay invested in government securities, Kicillof said at a press conference in Buenos Aires.

Argentina began selling the so-called Boden bonds, which unlike typical foreign-currency notes are governed by local laws, in 2005 to help pay back maturing debt four years after defaulting on a record $95 billion of securities.

Yields on the Boden bonds coming due next week surpassed 50 percent in the depths of the 2008 financial crisis. They again spiked past 20 percent in June 2012 on speculation lawmakers were planning to convert dollar-denominated contracts into pesos.

Four months later, the northern province of Chaco repaid its dollar-denominated bonds in pesos because the central bank denied its request to buy foreign currency, again sending yields on the Boden bonds toward 18 percent.

Foreign Bonds

“Anybody that’s held this bond through maturity has suffered,” said Andres Azicri, managing director at New York-based investment bank ACGM, who said he has traded the securities. “They’ve owned a credit that’s constantly changing the rules but has always shown a willingness to pay.”

While investors had traditionally perceived the securities as riskier than international bonds governed by New York law because of the unpredictable nature of Argentina’s policies, that changed in late 2012. For the first time, yields on similar-maturity global bonds surged significantly past those on the Boden notes after a U.S. Appeals Court made an unprecedented decision that upended Argentina’s debt market.

In October 2012, the court upheld an order to block the country from making payments on its overseas debt until holders of defaulted bonds from 2001, led by billionaire Paul Singer’s Elliott Management, were paid in full. The ruling eventually led to a second default on Argentina’s international bonds last year as President Cristina Fernandez de Kirchner wouldn’t comply, and investors in the U.S. and Europe fled to local-law bonds.

Court Battle

While Elliott has asked the U.S. court to include some local-law debt in its ruling, that decision is still pending and time has run out for the court to block Monday’s payout.

Greg Saichin, the chief investment officer for emerging-market fixed-income at Allianz Global Investors Europe GmbH, said he bought the bonds earlier this year. His decision came down to a belief that Fernandez wanted to pay the notes that her predecessor issued in full even as she refused to budge in negotiations with the holdouts.

“Argentina was going to continue servicing Argentina’s debt at all costs,” he said in an e-mail.

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