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Vulture Funds Circle Argentina, Waiting for Moment to Buy

Aline Oyamada and Sydney Maki

(Bloomberg) -- The sell-off in Argentina bonds is so severe that it may soon attract distressed-debt investors betting that there’s money to be made in a restructuring.

With overseas notes trading at about 38 cents on the dollar, the vulture funds are probably still a ways from swooping in. Shops including Morgan Stanley and Merian Global Investors expect buyers with a strong appetite for risk will emerge at about 30 cents.

“The market will go lower and distressed investors will step in at some point, even with the uncertainty,” said Alain Nydegger, a money manager at Pala Assets in Switzerland, which focuses on emerging-market debt.

Less than five years after settling with holdout creditors from a record default in 2001, Argentina is again looking like a ripe target for funds that specialize in wringing value out of distressed assets. Following a market rout in the wake of a primary election that showed the populist opposition likely to win the presidency this year, the government said Sunday it will impose capital controls as an emergency measure to shore up the peso.

Money managers and analysts had been saying that bondholders were likely to recoup 30 cents-to-40 cents on the dollar on Argentina’s international notes if the country goes through with a restructuring. So far, the government has said it wants to delay payments on up to $101 billion of debt.

Nydegger said that at 30 cents on the dollar the bonds start to look appealing, but some distressed funds would likely start adding at 35 cents. He said he would start buying at between 25 and 30 cents, figuring he’d make a profit with a 50% haircut if negotiations take three years.

Argentina’s century bonds, among the most traded, edged lower Tuesday to 37.7 cents on the dollar. Dollar notes due in 2048 changed hands at similar levels, while euro-denominated bonds due in 2028 and 2038 were slightly lower near 35 cents.

Distressed debt investors will probably wait until Argentine bonds are well below expected recovery values before buying, said Eric Baurmeister, who helps manage $12 billion in emerging-market debt at Morgan Stanley Investment Management Inc. in New York. Prices could drop to 20 cents on the dollar or lower, he said in an interview.

“What I fear -- and what I think is likely -- is that we’re in the beginning of this,” Baurmeister said. “It’s a little bit like the proverbial Pandora’s Box, and once you say that we’re going to restructure, then everything’s on the table.”

Holders of Argentine bonds issued in the past few years are bound by collective-action clauses that will limit their ability to seek a settlement apart from the majority of investors. That means there won’t be an exact repeat of what happened after the 2001 default, when a fund controlled by Paul Singer’s Elliott Management took Argentina to court for full repayment instead of accepting the terms to which most creditors agreed.

Argentine assets and foreign reserves have been plunging since the Aug. 11 primary election. Investors concerned that a government led by opposition candidate Alberto Fernandez would prioritize social spending over shoring up the budget has sent the peso down 19% since the vote, while reserves dropped $13 billion, or almost 20%, to $53.1 billion.

Under the rules announced Sunday, companies in Argentina now need the central bank’s authorization to buy dollars in the foreign-exchange market, except in cases of international trade. Individual Argentines, meanwhile, are limited to dollar purchases of no more than $10,000 a month.

Bonds may fall to the low 30-cents level before catching a bid, Morgan Stanley strategists led by James Lord wrote in a report Tuesday.

Delphine Arrighi, a London-based portfolio manager at Merian Global Investors, also cited the 30-cent level as potentially appealing to some investors. That, however, depends on the policy signals given by the incoming administration, she said.

Argentina’s valuations are “certainly starting to look more attractive,” even as investors search for clarity, said Graham Stock, a senior emerging-market sovereign strategist at BlueBay Asset Management in London. “At these kind of levels, I think not just distressed, but dedicated investors are going to start to look at adding positions again.”

(Updates bond prices in seventh paragraph. A previous version of this story corrected spelling of Fernandez in the 11th paragraph.)

To contact the reporters on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Brendan Walsh, Philip Sanders

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