Paul Singer, CEO of Elliott Management
Right now Argentina is in danger of a calamity, the likes of which the world hasn't seen since 2001, and it's all because of one hedge fund manager's tried and true strategy to make money off of distressed debt.
That's right, bringing a country to its knees is a "strategy."
According to a U.S. court's ruling, if Argentina does not pay a group of hedge fund managers over $1.3 billion worth of bonds by July 30, the Republic could go into default. If it goes into default — investors lose faith its capacity to pay, interest rates on its bonds surge, and the country is forced to print money to pay creditors — its economy could tailspin.
Then again, if Argentina does pay this group of hedge fund managers over $1.3 billion worth of bonds by July 30, it opens itself up to lawsuits from other investors who also own those bonds — lawsuits that could cost the country up to $15 billion. That's over half the money it has in its central bank.
So what's a country to do? And how did it get to this desperate point?
The bonds in contention in this case are Argentina's sovereign bonds issued in 2001, just as the country was collapsing.
That collapse, to hedge fund manager Paul Singer, looked like an opportunity to use a common strategy: distressed debt investing.
Here's how it works.
- You (the investor) buy garbage — securities that have defaulted and are essentially worthless.
- Why? Because you're making a bet that the entity issuing the securities will eventually get their house in order. As that happens, the value of the securities will increase and you (the investor) will get paid.
- In the meantime, debt issuers can also restructure debt as they struggle back into the black. That means negotiating with creditors to pay less. Creditors, thinking they would rather get some money than none, are usually willing to do that.
But not Paul Singer. No sir. And that's where this got complicated.
Singer is the man leading the group of hedge funds (known collectively as NML) in their effort to collect 100 cents on the dollar for Argentina's debt where other investors have taken a 70% haircut on their payout. To the Republic, that makes NML "vultures." Creatures that wait for other animals to hunt and eat the carrion left behind. It's not a nice thing to call someone.
But Singer couldn't care less; he has done this before. In fact, he's the king of this strategy.
In 1995 Singer bought Peruvian bank debt for $20 million and then sued until he got a $58 million payout. In 2002 and 2003 Singer made over $100 million in interest alone from buying $30 million worth of debt owned by Congo-Brazzaville.
Compared to Argentina, both those investments were a cake walk for Singer.
No one kicks or screams louder or harder than President Cristina Fernandez de Kirchner. She is a master of political theater — "they'll come to understand the strength of our national posture," she once said in a speech, "we will not pay by any means necessary."
That, combined with the horrific memory of Argentina's past defaults, makes this very sensitive to Argentines.
So for the past decade and change Singer has had to sue the country into oblivion, citing a pari passu clause in Argentina's bond agreement and arguing that it had a right to go after Argnetina's money wherever it may be according to the Foreign Sovereign Immunities Act.
Here's what that means:
- The pari passu clause essentially means that the Republic cannot pay some bondholders and not others, which is what it had been doing.
- The Foreign Sovereign Immunities Act is the law governing how foreign countries can be sued in America. To get his money, Singer has chased Argentina's assets all over the world, arguing that even if he couldn't take them based on a U.S. court jurisdiction, he could try to sue the Republic in whatever country he found their money.
- Argentina disagreed with all of that and appealed the matter up to the Supreme Court and lost.
- While all that was happening, Singer showed the entire world what he could do in limbo. He basically pirated one of the country's ships sitting in a Ghanaian port. And based on a 2013 investor letter, it sounds like Singer had fun with it:
... Argentina continues to thumb its nose at the international community by picking and choosing at its own discretion which laws it will observe and which ones it will ignore. As reported in our last quarterly investor letter, in early October we obtained from a Ghanaian court an order detaining an Argentine naval training vessel in order to secure judgments against Argentina rendered in the U.S. courts. Argentina appealed to the Tribunal for the Law of the Sea Convention (yes, there is actually such a body) in Hamburg, which in mid-December ordered Ghana to release the ship. Before the Ghanaian courts could even consider whether the Tribunal’s ruling should be given effect in that country – a question as to which there was considerable doubt, given that Ghana has enacted no substantive law providing that orders of relief from this body supervene the decisions of the Ghanaian courts – Argentina grabbed its ship and skipped town.
- So where are we now? Argentina lost its appeals on both parts of the case and has said that it will negotiate with NML. Based on the a lower court's ruling, though, it has until July 3o to pay all its bondholders. Until then, the Republic has tried to a get a stay on payment reinstated to buy some time. That didn't work.
- Thursday night Argentina's Finance Minister Axcel Kicillof tried to get away with paying some bondholders and not NML. A New York Judge then sent that money right back where it came from.
"Mr. Kicillof suggested Argentina would go to the international court of The Hague to demand the sovereign immunity the US Justice rejected to grant," Deutsche Bank wrote in a note Friday morning. "Within minutes, NY Second District Judge Griesa confirmed the stay will not be reinstated and holdout lawyers asked the Judge to hold Argentina in contempt for ordering restructured bond payment excluding holdout debt. Simultaneously talks have continued between the Republic and the holdout representatives guided by the special mediator named by the court. In our view, the Argentine authorities are aware of the terrible implications a default would create, and they also know that a debt swap to local debt is not a solution to the existing legal/technical challenge. However, the authorities seem to be willing to use all available political and legal means to gain time and negotiation space. Therefore, although the Argentine government continues to show willingness to pay all creditors, negotiations to settle a proper formula might take time and likely prevent full debt service next week."
And that is how an investor can take a country to the brink of disaster.
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