Loomis Sayles Bets Holdouts Will Be Rewarded in Iceland FX Deal

Updated on
  • U.S. fund declines government’s latest offshore krona offer
  • Says it’s in it for the long haul as capital controls end

Loomis Sayles & Co. won’t accept Iceland’s terms to buy back its krona holdings as the U.S. fund instead opts to wait for the currency to pick up and boost the value of its investment.

Loomis, which is estimated to have as much as $360 million stranded in Iceland as a consequence of capital controls imposed in 2008, rejected a deal it was offered when the country exited the restrictions earlier this month. That’s because the investor expects to get a better return when capital flows are normalized, Peter Sheehan, a senior analyst with the fund, said in a telephone interview.

Iceland said on March 12 it was exiting currency restrictions imposed on residents, corporations and pension funds for more than eight years. Loomis is one of four U.S. funds that together hold most of the $1.7 billion in offshore krona assets still trapped behind capital controls.

In announcing the end of the capital controls, the government also said the central bank had reached a deal on buying back 90 billion of the trapped kronur at a rate of 137.5 per euro, about 15 percent below the current market rate. It’s unclear which of the three remaining funds -- Eaton Vance Corp., Autonomy Capital LP and Discovery Capital LLC -- had agreed to that transaction. The deal expires on March 28.

“They’re offering us a haircut to par and we’re willing to take a long-term approach and wait it out until the offshore and onshore rates normalize and they fully lift the capital controls, to a level that’s reflected in their credit rating,” Sheehan said. “We’re willing to take the risk on the currency in the process.”

Spectacular Rebound

Eaton Vance and Autonomy Capital are currently engaged in a legal battle with Iceland after refusing to take part in a 2016 currency auction that would have forced them to exchange their kronur at a rate of 190 per euro.

Since its spectacular 2008 banking collapse, Iceland has won praise for its handling of its economic reconstruction. The island is now struggling to steer its rebound, with annual GDP growing 11.3 percent in the fourth quarter. Foreign investors are showing renewed interest in the island and a tourism boom even threatens to overheat the economy.

Goldman Sachs Group Inc. was one of the first to invest in Iceland following the March 12 announcement, snapping up a 48.8 billion-krona stake in Arion Bank hf. S&P Global Ratings upgraded Iceland’s sovereign debt one step to A on March 17.

The development is encouraging and is why Loomis is willing to wait, Sheehan said.

“The credit rating that they currently have certainly reflects a country that doesn’t have capital controls on offshore investors,” he said. “We’ve been patient thus far and we’ll continue to be patient.”

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