Hugely Profitable Argentina Bond Bet Suddenly Becomes Not So Hot

  • Investors bought defaulted notes hoping for tag-along gains
  • Piggybackers to get fraction of what plaintiffs stand to earn

Speculators who piled into Argentina’s bonds in recent months hoping to make a quick profit from its defaulted-debt dispute may be in for disappointment.

Longstanding holdout creditors led by billionaire Paul Singer, who took their case over the country’s 2001 default to court and won a favorable ruling, are in line for payouts worth about 245 cents on the dollar based on the proposal by the Argentine government, according to Exotix Partners LLP, a London-based brokerage that specializes in illiquid securities.

But others, including latecomers who snapped up the debt for as much as 220 cents to piggyback on those gains, would get just 150 cents on the dollar in the settlement offered by Argentina, said Exotix and Seaport Global Holdings LLC.

“Those people who purchased the debt and didn’t join the lawsuit did so thinking they would ride along and be able to capture the same treatment passively,” said Michael Roche, a strategist at Seaport, a New York-based brokerage. Now, “they’re in a tight spot.”

To be sure, betting on the securities has been largely successful over a longer period of time. Those who bought the defaulted dollar bonds three years ago, when they traded at about 20 cents to the dollar, would make more than seven times their money even if they end up accepting Argentina’s offer.

The defaulted notes have tumbled to 175 cents on the dollar since the country made its proposal, according to prices compiled by Exotix. While the bonds have retreated as speculators responded to what Roche characterized as a “disappointing” offer, they still signal that investors expect that an improved offer is possible.

That’s looking less likely after a U.S. judge on Friday agreed to lift a ban on Argentina paying restructured debt, a move that reduces leverage even for long-time holdouts like Singer. District Judge Thomas Griesa’s decision paves the way for Argentina to return to international capital markets for the first time since its $95 billion default in 2001.

Stephen Spruiell, an Elliott spokesman, didn’t respond to an e-mail seeking comment.

Argentina has already agreed to pay more than $1 billion to settle with billionaire Kenneth Dart’s EM Ltd. and Montreux Partners as newly elected President Mauricio Macri makes good on pledges to reach deals that would lure investment and financing to South America’s second-largest economy. Argentina struck deals with another five funds on Monday for a total of $250 million and 185 million euros ($203.5 million), according to debt mediator Daniel Pollack.

Argentina plans to issue as much as $15 billion of bonds to pay holdout creditors once Congress repeals two key laws, Finance Minister Alfonso Prat-Gay told reporters in Buenos Aires on Monday.

“There was always a chance that Argentina would sweeten the deal to get more people in, but that doesn’t look so likely to those that are outside the legal case,” said Stuart Culverhouse, an economist at Exotix. “Most people were disappointed by the offer, but Argentina has so far been able to get away with it.”

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