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Paul Singer Wins Long Battle With Argentina; Have Emerging Market Bonds Hit Bottom?
FORBES STAFF
I cover finance, the law, and how the two interact.
Paul Singer‘s Elliott Associates and a handful of other holdouts scored a near-total victory over the Republic of Argentina as that country agreed to pay $4.75 billion — three-quarters of what they were owed — to settle claims over defaulted government bonds.
The settlement represents the price Argentina had to pay to re-enter world credit markets after losing a pivotal appeal to the U.S. Supreme Court in 2014. And it could increase confidence in other emerging-market debt as investors begin to reassess the ability and willingness of countries to pay interest on their beaten-down bonds.
Singer: Pay me now or pay me later, but pay me. (Chris Ratcliffe/Bloomberg)
“Argentina has gone from 12 years of policy deterioration to exceptional government policy” under President Mauricio Macri, saidColm McDonagh, head of emerging-market debt at BNY Mellon’s Insight Investment unit. “They can go and borrow now, and people will start bringing money back onshore.”
Argentina’s capitulation comes just a few weeks after “the peak of bearishness” in emerging-market debt, said McDonagh.With yields on dollar-denominated bonds ranging from 7-15% for sovereign debt in countries like Argentina and Ivory Coast and real yields on local currency bonds running from 3.5% for Mexico to 5% for Romania, he said, emerging-market debt finally offers enough return to reward taking a risk.
“We’re going to clients now and saying you’ve got to look at EM,” said McDonagh, whose group oversees $3 billion in assets. “You’re starting to see policy action from some of these countries.”
Singer’s NML Capital, managed by Elliott Associates, was among a small group of holdouts that resisted Argentina’s attempt to restructure some $24 billion in debt the country defaulted upon in 2001 by issuing new bonds of lesser value. The holdouts brought 11 lawsuits in federal courts in New York and won all of them, including a Second Circuit Court of Appeals decision prohibiting Argentina from paying on the new bonds unless it also paid the hedge funds their pro rata share of what is owed.
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Argentina fought hard under former President Cristina Kirchner to avoid paying the hedge funds full value for bonds they mostly bought at deep discounts after the default. Incoming President Macri took a different tack after winning election in November, immediately launching round-the-clock negotiations to resolve the bond dispute.
“Their course-correction for Argentina was nothing short of heroic,” said Pollack in a statement, and Singer “involved himself intensely with me over the past several weeks on behalf of `holdout’ bondholders. He was a tough but fair negotiator.”
The settlement may mark a low-water mark for emerging market bonds, which fell out of favor after climbing on euphoric predictions of rapid economic growth and the idea they offered diversification from the industrialized economies.
“People just went on a hunt for yield and didn’t distinguish the type of risk they were taking,” McDonagh told me. “The peak of that was in 2011.”
Plunging commodity prices crimped the finances of many of those countries and now they are forced to make tough policy choices, such as cutting spending and popular subsidies, to keep paying their debts. Copper-dependent Zambia was able to sell its 5 3/8% bonds at par during the boom and now, with copper prices down, its debt is trading at a 12% yield.
“We’d actually imagine the true risk premium is somewhere in between,” he said.
Eastern European countries are “almost looking like bastions of security, he said. And across Latin America countries like Argentina are starting to restructure their fiscal policies to deal with slow or negative economic growth.
“We think now, even though they’re in a difficult place, you’re being paid to take risk,” he said.
One exception: Venezuela, where inflation is raging amid shortages of all manner of consumer goods.
“The economy there is deteriorating so badly we’re not sure what changes can be made by the current government to make it better,” he said.
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