TCW Disregards Singer Default Talk in Argentine Bond Bet
TCW Group Inc.’s $7.6 billion flagship emerging-markets debt fund, which has beaten 98 percent of rivals in the past five years, is snapping up Argentine bonds at just the right time.
While the world’s least-creditworthy nation has threatened to default rather than comply with a U.S. ruling to pay holdout creditors, the U.S.-based TCW Emerging Markets Income Fund (TGEIX) has bought about $203 million in principal of bonds since an appeals court in October ordered the nation to treat all its bondholders equally, according to filings compiled by Bloomberg. Argentina’s dollar-denominated notes have returned an average 12.9 percent since Nov. 1, the most among 53 countries tracked by Bloomberg’s Emerging Market Sovereign Bond Index. (BEMS)
“Technical default is a high probability, but we still think that Argentina’s willingness to service its debt is strong and they will figure out a way to pay their bondholders,” David Robbins, who helps manage the Emerging Markets Income Fund, said in a telephone interview from New York. “Our feeling is at this point in the market, you’re supposed to be getting long Argentina in spite of the potential volatility coming from the imminent court ruling.”
The institutional share class of the fund, also managed by Penny Foley, returned an annual average of 12.83 percent over the past five years, according to data compiled by Bloomberg. Similarly-managed funds returned 7.4 percent on average in the same period.
The fund, which didn’t own Argentine debt before November, has increased its position four out of the five months since, company filings through April show. It holds about $54 million in principal of the so-called Global 17 dollar bonds and about $88 million of euro-denominated discount bonds due 2033.
TCW is now among the biggest holders of those two restructured bonds, according to company filings compiled by Bloomberg. The flagship fund, along with the firm’s smaller local-currency fund, also own dollar bonds due 2015 sold under Argentine law, which won’t be directly affected by the appeals court’s decision.
Investors are waiting for the federal appeals court to decide whether to uphold a lower court order that would require Argentina to pay in full creditors from its $95 billion default in 2001, including billionaire Paul Singer’s Elliott Management Corp., that rejected debt swaps in 2005 and 2010, at the same time as holders of the restructured bonds. Creditors accepted losses of about 70 percent in the restructurings.
While Argentina has said it wouldn’t comply with such an order, fueling speculation the country will default for the second time in 12 years, TCW says that it is betting the nation will eventually find a way to service performing debt.
Filings show the TCW Emerging Markets Income Fund increased its Global 17 notes by 16 percent in April, which rallied after Argentine Vice President Amado Boudou said March 31 the nation will pay bondholders of restructured debt regardless of the court outcome.
While trading in five-year credit-default swaps indicates the probability of a default at 88 percent over that period, Boudou’s comments have fueled speculation that Argentina will remove its bonds from U.S. jurisdiction or design a local-payment system to continue servicing the securities.
“There are a variety of potential solutions that the government may choose to pursue,” said Robbins.
Aberdeen Asset Management Plc says that bullish investors are underestimating how difficult it may be for Argentina to pay bondholders because District Court Judge Thomas Griesa’s order, if upheld by the appeals court, would block intermediaries from helping implement such a plan.
Since the end of last year, Aberdeen’s Select Emerging Markets Bond Fund has sold all its holdings of Argentine restructured dollar and euro bonds, March 31 filings show.
The cost to protect Argentine debt against default with swaps over the next five years fell 155 basis points, or 1.55 percentage point, to 2,933 basis points at 3 p.m. in New York, according to CMA Ltd prices.
The extra yield investors demand to own Argentine bonds instead of U.S. treasuries rose 10 basis points to 1,205 basis points at 3:13 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.
AllianceBernstein LP, which owns at least $588 million of Argentine debt in principal, according to first-quarter filing data compiled by Bloomberg, says holding local law bonds and so-called par bonds maturing in 2038 enables the firm to have a defensive position while still profiting from the highest yields in emerging markets.
The firm is supporting Argentina in challenging the lower court decision as a member of the Exchange Bondholder Group, an alliance of investment companies that also includes BlackRock Inc. and Gramercy Funds Management LLC.
The par bonds are the cheapest dollar-denominated restructured bonds at 33.7 cents on the dollar and yield 11.3 percent, according to prices compiled by Bloomberg.
“If there is an inability to pay because of a court ruling, we believe owning low dollar-priced bonds gives a better risk-return ratio in this uncertain environment,” Paul Denoon, who oversees about $29 billion as head of emerging-market debt at AllianceBernstein, said in a telephone interview from New York. “We’re more defensively postured from a security selection. There are some things for us to do in here to try and protect the downside, and generate what is still pretty attractive income in today’s environment.”