A $19 Billion Credit Fund Can't Wait to Pile Into Argentina Debtby and
Highland's Dondero says fund will buy new Argentina bonds
Argentina plans to sell almost $12 billion in mid-April
When Argentina makes its long-awaited return to international bond markets next month to raise almost $12 billion, the nation can count on Highland Capital Management LP to be one of the buyers.
The asset management firm, which oversees $19 billion, including credit hedge funds and emerging market credit funds, will look to snap up "significant amounts" of the securities, according to Jim Dondero, the president and co-founder of Dallas-based Highland. Before paring its holdings over the past six months, the firm had been the biggest holder of Argentina’s $4 billion of notes due in 2033.
Highland’s plan to invest is a good sign for Argentina as the country attempts to sell an unprecedented amount of debt to pay for settlements with holdout creditors led by billionaire Paul Singer. It also suggests that so-called distressed debt investors who have piled into Argentina in recent years may remain buyers of the country’s debt even after it exits default.
"We plan to hold what we have in the original bonds but are looking to buy some of the new issuance," Dondero said from Dallas. "We’re optimistic on where Argentina is likely to price the debt and where it’s likely to trade, especially relative to other Latin American sovereigns."
Argentina plans to issue $11.68 billion of bonds to yield 7.5 to 8 percent in mid-April, Finance Ministry officials told Congress on Friday while presenting a debt bill to clear the way for a deal with most holdouts. It will sell three bonds with maturities of 5, 10 and 30 years, Finance Secretary Luis Caputo said.
The government, which will issue the debt under New York law, expects yields to fall to about 6 percent in the short term on ratings upgrades and on improving outlooks for the country’s fiscal and monetary situation, he said.
President Mauricio Macri has moved swiftly to regain market access and reverse the policies of his predecessor Cristina Fernandez de Kirchner since taking office on Dec. 10. The nation has been shut out of global markets since a record $95 billion default in 2001. It has been unable to pay holders of its restructured foreign-law bonds after another cessation of payments in July 2014, when Fernandez flouted U.S. court orders to settle with creditors.
Highland is set to be among the biggest winners when U.S. District Judge Thomas Griesa lifts the ban that’s prevented the country from paying its restructured debt. The fund purchased the 2033 bonds in June 2014, when they were trading in the mid-70s. Dondero said Highland has earned annualized returns on Argentina bonds of close to 20 percent since June 2014, helping offset losses from investments in the energy sector last year. That compares with average returns of 3.3 percent for emerging-market debt over the same span, data compiled by JPMorgan Chase & Co. show.
The so-called Discount bonds due 2033, which trade with accrued and past due interest included in the price, rose 0.2 cent to 117.13 cents on the dollar on Tuesday after reaching 119 cents on Feb. 22.
“Our initial impression in 2014 was something had to give,” Dondero said. “It was a resource-rich country shrinking their production and running down their foreign reserves. The consequences of being a financial pariah, horrific tax policies, price manipulations and massive subsidies were reaching an inflection point. Our view, which I think was a good interpretation and ended up being correct, was that there was an intermediate-term inevitability to settle with holdouts that would have the bonds trade higher.”
Dondero said he’s pursuing investment opportunities in the country beyond sovereign debt and may be looking to start an Argentina fund. Like Highland, other holders of the nation’s defaulted debt are likely to reinvest in Argentina after they are paid, according to Bank of America Corp. analysts Jane Brauer and Sebastian Rondeau.
“There has been an expectation that distressed investors will exit when the transaction is complete, but instead we see many funds creating dedicated Argentina funds to invest in debt, equity or even private equity,” they said in a March 3 report. “The new bonds, if priced correctly, would be just another asset for providing potential upside compared to alternative Argentina assets.”