Paul Singing "Bonds Don't Cost a Thing"
How one fund cashed $2 billion on Argentina's foreign debt
Welcome Avatar! No matter how distressed Argentina’s situation has been throughout the years, there are always opportunities. The bond holdout debacle of the early 2000s is an example of one “vulture fund” that dared to buy up Argentina’s distressed debt. After a 15 year waiting game, payday came. This is the story of Elliott Management’s bond play that resulted in a return of historic proportions.
Argentina was described […] as a “uniquely recalcitrant debtor,” and the court tailored its ruling to the specific facts of the Argentina case. We aren’t likely to see another restructuring as difficult and contentious as Argentina’s, because we aren’t likely to see another country emulate such a coercive and self-destructive approach.
The Default is to Default
The self-destructive approach described by Singer above is one we have seen multiple times throughout the last half century.
The start of the 21st century was turbulent for Argentina when the country defaulted on $80 billion USD in debt in 2001, sparking a hedge fund war, next to the social unrest in that same period.
Not everyone was in panic mode though. Paul Singer’s firm Elliott Management purchased bonds both before and after the 2001 default.
For some more background on the total currency chaos on the ground in 2001, this is a recommended read:
Argentina had to restructure this debt and come up with a solution. For the majority of the country's creditors (92%), this meant that they agreed to accept only 30 cents on the dollar for the bonds they owned and in 2005 and 2010 this part of the bond holders agreed to take the hit.
The remaining 8% of creditors however, which included Elliott Management, other hedge funds, and some small independent creditors, opposed the arrangement.
These creditors said that Argentina could afford more than it had offered, and that they should not be forced to accept a bad deal.
In his famous Wall Street Journal letter “The Lessons of our Bond War”, Singer explains this in more detail:
When we first invested in these bonds in 2001, we believed that a negotiated restructuring could help Argentina avoid default. We also believed that if we participated in a negotiation, we could help achieve a good deal for all of the country’s bondholders.
As it turned out, Argentina chose to default, and its leaders refused to negotiate. Normally, sovereign restructurings are completed quickly—a 2013 study by the Moody’s rating agency put the average at around 10 months. But it was nearly three years before Argentina’s leaders even put an offer on the table.
When they finally did, bondholders—including many individual Argentines—were given a take-it-or-leave-it offer of new bonds worth just 30 cents for every dollar owed on the old bonds. Argentina’s leaders even took the extraordinary step of passing a law prohibiting payment to any bondholder that rejected the offer.
This would be the beginning of a 15-year long battle, during which Argentina officially remained in default, and was practically unable to access international credit.
The situation became so dire, that Argentina even had to run to Venezuela’s Hugo Chavez for a total of $5.5 billion dollar credit from 2005 through 2008, at absurd interest rates (almost 16% on dollars). All because the Kirchner government refused to settle with the holdout bond holders.
Attempts to Collect
Elliott Management's creative methods to try to collect the debt in the Argentine case attracted international attention.
One of the most famous attempts to collect its debt occured in 2012, when Singer’s fund embargoed an Argentine navy ship Libertad docked in Tema, Ghana, with more than 250 crew members on board.
Even though the Libertad was only worth a fraction of what the hedge fund claimed it was owed, Elliott Capital convinced a Ghanaian court to confiscate the ship in order to collect on its debt. Argentine officials slammed Elliott as "unscrupulous financiers," and the ship was released after being held hostage for more than two months.
In 2013, Singer's fund sued SpaceX to reclaim funds given to the business by Argentina for satellite launches. It also attempted to seize two satellite launch contracts between Argentina and SpaceX.
In 2014, NML Capital (owned by Elliott Management) won a verdict that permitted them to join the probe into an embezzlement scandal involving Argentina's president at that time, Cristina Kirchner.
According to an Argentine prosecutor, a construction company stashed Benjamins improperly extracted from public projects in a Nevada bank account. In Singer’s NML view, that money belonged to the people of Argentina, and so, it belonged in his coffers.
Argentina’s Response
All these attempts to collect the amount due prompted the Argentine government to initiate its own campaign against "vultures" and "financial terrorists."
The country ran full-page advertising in The Washington Post and other magazines, and it attracted some backers on Capitol Hill. Argentina contended that granting the hedge funds what they wanted would expose the country to a cascade of claims that it could not afford to pay.
The reasoning was that if they paid these 8% holdouts the full amount due + interest, the other 92% could start suing Argentina for unfair treatment, despite having signed waivers.
In a 2013 letter to members of Congress, Argentine Ambassador Cecilia Nahon stated, "Argentina is committed to a solution in which all bondholders are treated equally," adding that the hedge funds were making "unscrupulous claims."
But none of these cries for help moved the holdout hedge funds. Argentina, the hedge funds said, breached the pari passu rule, which requires equal treatment of bondholders, by paying some while denying others.
Eventually, Argentina was ordered to pay the holdouts by U.S. District Judge Griesa, who agreed.
Argentina appealed many times but failed, resulting in a $29 billion debt default in 2014 for attempting to pay some creditors while ignoring others (the holdouts).
Macri saves the Day
When Mauricio Macri won the presidential elections in 2015, payday for Elliot Management had finally arrived. Macri was dead set on getting Argentina out if its default in order to get access to international credit again. In Singer’s words:
In late 2015, Argentines voted in a new government. By that time, the country was in default to multiple classes of bondholders and isolated from financial markets. With the economy suffering from rampant inflation and capital flight, it is little wonder that the people voted for a candidate whose slogan was “Let’s change.”
The new administration understood that the path to prosperity had to begin with re-engagement with the global economy and a quick resolution of the creditor dispute.
Our long-standing offer to negotiate was finally met with a positive response.
Unlike most of the creditors who walked away with 30 cents on the dollar, Elliott and other prominent U.S. hedge funds proved that the payout was worth the wait, and got around 75% of what they were owed.
The Argentine government agreed to a deal in which Singer's fund would get $2.4 billion in compensation for bonds that the government had failed to pay.
The bonds had a face value of $617 million but were bought for around $117 million, a trade with a total return close to 2,000%. After cashing the check, Singer concluded:
The lessons of this story are clear: The rule of law is not a liability for a country. It is an asset.
Sovereign-debt restructurings can quickly and easily be achieved when both sides are willing to negotiate in good faith.
And the key to ensuring timely and orderly restructurings lies not in vitiating the enforcement of contractual rights, but in encouraging sovereigns in need of restructuring to avoid Argentina’s costly and unnecessary mistakes.
And costly those mistakes turned out to be. In total, Argentina agreed to pay $4.65 billion in cash to the 8% holdouts, comprised of Singer, Bracebridge Capital and two other hedge funds.
That amount included $4.4 billion for 75 percent of the nearly $5.9 billion claims in New York, as well as $235 million for claims outside that jurisdiction and part of the legal costs of the holdouts.
The $5.9 billion dollars was made up of about $1.2 billion of principal and $4.7 billion of interest that kept running throughout the close to 15 year period. Ouch.
The return on principal was almost three times what the investors earned who accepted the terms of Argentina's 2005 debt restructuring.
Sometimes it pays to wait a bit longer and sit it out.
See you in the Jungle, anon!
Patience is a virtue. In any dispute, when you do the right thing and have the law in your side, you typically will prevail.
Thanks for educating me on Argentinian history!