Buenos Aires Investor Trumpets 20% Return in Obscure Market

  • Many payroll loans to state workers have 60% interest rates
  • Melhem is seeking to raise as much as $200 million for fund

Daniel Melhem, a money manager at Knightsbridge Partners Ltd., is looking to capitalize on Argentina’s high interest rates in an obscure corner of the nation’s debt market: payroll loans taken out by state employees.

His firm wants to raise as much as $200 million to create a closed fund that will buy the loans, which are automatically repaid from borrowers’ paychecks. Melhem says investors will net annual returns of up to 20 percent in dollars.

Argentina’s local borrowing costs have surged to among the highest in the world since President Mauricio Macri took office in December pledging to quell inflation. While central bank bond yields have come down from a peak of 38 percent in March, interest rates on the approximately $3 billion of payroll loans to teachers, police and other civil servants are about 60 percent.

“We knew that a serious government with a well-run central bank was going to hike the interest rate,” Melhem said from Buenos Aires. “Our bet was to look for a security that would allow you to lock in those rates.”

Melhem, who was the head of Morgan Stanley’s private-wealth management for Brazil, Argentina and Chile before founding Knightsbridge in 2003, says payroll loans in Argentina boast a default rate of just 1 percent and maturities as long as 3 years.

As yields on Argentina’s foreign bonds tumble this year and opportunities in the local debt market remain limited, Melhem says payroll loans offer a lucrative alternative. Yields on the country’s so-called Bonar bonds due 2024 have fallen 1.6 percentage points this year to 6.2 percent.

Until a month ago, the longest fixed-rate local bond had a maturity of just 252 days.

“Argentina’s sovereign yields fell so much that the market stopped being attractive,” Melhem said. “Now, the way to go is to take advantage of central bank rates and go as long as you can.”

    Before it's here, it's on the Bloomberg Terminal.