Global Policy Forum

Billionaire Hedge Funds Snub 90% Returns

Billionaire "vulture investors" Kenneth Dart and Paul Singer are seeking a US Supreme Court hearing to help their slew of lawsuits against Argentina. Dart and Singer are seeking to be paid in full for debt securities they hold but the Argentinean government says they have foregone their chance when they declined "swap" offers in 2005 and 2010. A Supreme Court hearing could technically lead to claims on Argentinean funds held at the NY Federal Reserve, but mainly appears to be part of a broader strategy. The vulture investors have used similar tactics to take advantage of distressed governments in the past, among them Brazil and Peru.

By Drew Benson

January 23, 2012

Billionaire investors Kenneth Dart and Paul Singer rejected Argentina's defaulted debt restructuring in 2005. Since then the securities have beaten returns on emerging-market bonds, global stocks and oil.

While Dart's EM Ltd. and NML Capital, a unit of Singer's Elliott Management Corp., seek a U.S. Supreme Court hearing to help their lawsuits aimed at recouping at least $2 billion they say they are owed, creditors who accepted the 2005 offer of 30 cents on the dollar have received returns of about 90 percent, according to estimates by Morgan Stanley. The Supreme Court asked the Obama administration last week for advice on whether it should hear an appeal from the hedge funds.

The restructured securities have outpaced the 70 percent return on emerging-market dollar debt, 24 percent gain in global stocks and 75 percent rally in oil as Chinese demand for Argentine soybeans helped propel growth. Dart and Singer, who used similar legal tactics to make money during Brazilian and Peruvian restructurings in the past two decades, have been unable to seize Argentine assets that could satisfy their demands.

"Tendering in 2005 was by far the best option for investors," said Alberto Bernal, head of fixed-income research at Bulltick Capital Markets in Miami. The holdout funds "will make money, but it's debatable if they'll make more than if they tendered before."

Two Restructurings

Argentina, which defaulted on $95 billion of bonds in 2001, offered foreign investors a choice of par bonds due in 2038 or discount debt maturing in 2033 in the 2005 exchange. Warrants that pay investors based on annual economic growth were issued with the bonds as well and now trade as separate securities.

Yields on the discount bonds have fallen 102 basis points, or 1.02 percentage points, this year to 10.77 percent, leaving them down 115 basis points over the past two years. The dollar- denominated warrants have more than tripled in price since the exchange to 13.15 cents as of Jan. 20 and have made five annual payouts worth a total of 11.75 cents, according to data compiled by Bloomberg and Argentina's Economy Ministry. Annual economic growth has averaged 7.1 percent over the past six years.

Morgan Stanley's 90 percent return estimate is for creditors who have held onto the securities since the swap.

Dart and Singer's funds, which also turned down a second exchange offer in 2010, are seeking to enforce several judgments they've won in U.S. courts. The Supreme Court is considering whether to hear an appeal from the funds related to their attempts to seize $100 million in Argentine central bank assets being held at the Federal Reserve Bank in New York. A federal appeals court said that money is shielded under the U.S. Foreign Sovereign Immunities Act.

'Whatever It Takes'

Argentina expects the U.S. will support its position in the case, said an official at the country's central bank who declined to be identified because he isn't authorized to speak publicly. The government says that so-called vulture investors holding about $4 billion of debt are pursuing litigation against the country.

Officials at Elliott declined to comment.

"We're glad to see the Supreme Court is seriously considering hearing the appeal," said John Missing, a lawyer for Dart's EM at Debevoise & Plimpton in London. "It's important that the courts get this right especially given the welter of potential sovereign defaults that are hanging out there. We're prepared to go the distance, to do whatever it takes to get what we're entitled to on these bonds."

The U.S. Department of Justice declined to comment on the appeal, said spokesman Charles Miller.

Past-Due Interest

The hedge funds are pursuing an "expensive strategy," yet will likely profit if they recover past-due interest and interest on interest in addition to principal, said Siobhan Morden, the head of Latin America strategy at RBS Securities Inc. in Stamford, Connecticut.

"The value of their claim is going to become increasingly dependent on interest in arrears as opposed to the recovery of principal," Morden said. "There's an inflection point at which you will reach break-even in terms of accruing interest."

President Cristina Fernandez de Kirchner, who began her second term in December, four years after succeeding her husband, said in 2010 that the second restructuring offer was the final chance for holdout creditors to get new bonds. Argentina hasn't sold bonds overseas since the default, tapping central bank reserves instead to make debt payments.

'Opportunity Cost'

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps fell 112 basis points last week to 789, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The peso fell 0.1 percent to 4.3245 per dollar at 10:06 a.m. in Buenos Aires.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries fell 36 basis points to 785, according to JPMorgan Chase & Co.'s EMBI Global Index. The yield spread has declined from 925 basis points at the end of last year.

"Argentina has been one of the strong performers during the past five years in emerging markets," said Vitali Meschoulam, head of Latin America strategy at Morgan Stanley in New York. "Obviously there is an opportunity cost of these guys not having participated in the 2005 exchange."


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