Argentina Buyback May Flop as GDP Warrant Sellers Hard to Findby
About $13.8 billion of the debt securities are outstanding
Finance Ministry said it would save $9.4 billion with buyback
Argentina’s bid to buy back securities tied to economic growth may run up against one big problem -- holders of the debt don’t seem all that interested in selling.
They’re betting the $13.8 billion of so-called GDP warrants will rise in value as President Mauricio Macri removes most currency controls and lures foreign investment, boosting the country’s long-term growth prospects. The dollar-denominated securities have gained 7 percent this year as holders wager the economy will rebound from what Moody’s Investors Service predicts will be a recession in 2016.
Argentina is seeking to repurchase the warrants because they’ve become a financial burden since they were issued to persuade creditors to accept debt restructurings following the country’s record $95 billion default in 2001. The Finance Ministry said the country would save $9.4 billion if it bought back all of the outstanding warrants, which mature in 2035. A payout is triggered when the economy expands more than 3 percent annually, which means holders are unlikely to get paid for a sixth straight year. The government looks to sell $5 billion in international bonds to fund the buyback, La Nacion newspaper reported.
“Ultimately the value of the warrants isn’t the value between now and December, but between now and 2035,” said Stuart Sclater-Booth, a money manager at Stone Harbor Investment Partners, which owns euro- and dollar-denominated warrants. “We’ve bought the warrants as a long-term investment where we think that you can make three times your money. We think the warrants have much more value than what the option provides and it’s unlikely we’ll participate in the option structure.”
Those who accept a so-called collar mechanism proposed by the Finance Ministry will have the option of selling the 2010 dollar-denominated warrants for a low of 10 cents when the option is executed, while the government will be able to buy back the securities for a high of 11.75 cents. The dollar warrants issued in 2010 closed at 9.97 cents per dollar Monday.
Dollar-denominated warrants issued in 2010 extended gains to 10.3 cents as of 1:51 p.m. in Buenos Aires.
A Finance Ministry official had no immediate response to an e-mailed request for comment on whether the government expects a high investor demand for the offer.
Before becoming finance minister in December, Alfonso Prat-Gay said in a 2014 column for the Argentine newspaper Cronista that the “darn warrants” were the “great fiasco” of the nation’s debt restructuring.
The buyback offer comes as Argentina’s national statistics agency, known as INDEC, is expected to release its first-quarter gross domestic product report on Wednesday. In April, the government said it would change the way it measures economic expansion, sparking concern that warrant holders will get fewer payouts.
“What’s most striking with the announcement is the timing and the fact that as of today, there is asymmetric information for making an informed decision,” Daniel Chodos, a strategist at Credit Suisse Group AG, said by telephone from New York. “The government has yet to disclose which formula they will use to revise the warrant’s thresholds. This problem of asymmetric information prevents investors from assessing the upside on these instruments.”