Some of the biggest institutional investors in London signalled yesterday that they would participate in Argentina’s debt restructuring, despite its flaws. The news will come as a relief to President Nestor Kirchner’s government and will help soften the blow dealt by the country’s biggest private creditor, the Argentine Bond Restructuring Agency (ABRA), which stated that it would reject the offer.
ABRA, which represents mainly German and Austrian retail investors, who hold $1.2 billion of defaulted bonds, said it had “a number of reservations regarding the exchange offer.” While the group has not stated what strategy it will now pursue, one avenue open to them is to seek better terms in the law courts.
A group of investors speaking at the Emerging Market Traders’ Association (EMTA) Winter Forum in London, however, indicated that they would rather cut their losses than get involved in a drawn-out legal fight.
“I have no time for a battle,” said Simon Treacher, product manager at BlueBay Asset Management, a hedge fund in London. “I am a trader, legal issues are not my game.” Brett Diment, managing director at Deutsche Asset Management, also said he would participate in the deal. In any case, he added, he had bought Argentine bonds at very low prices.
Ingrid Iversen, head of emerging markets debt at Insight Investment, the asset management arm of HBOS, expected a high participation rate. “There is no appetite for a fight. The participation rate could reach 90%,” she said, though Iversen does not hold any Argentine debt.
John Carlson, senior portfolio manager at Fidelity Investments, offered a more bearish view. He said that Fidelity had yet to reach a decision about whether to take part in the offer. He added that he did not expect the participation rate to be greater than 50%.
Earlier, a panel representing the sell side reckoned that the participation rate would be above the 50% that the Argentine government is seeking but less than the 75% that the IMF has suggested as a minimum level. Most analysts on the panel believed that the rate would be about 65%. However, Walter Molano, managing partner at BCP Securities, said that the final figure is irrelevant.
“Regardless of the level of participation, this exchange will be a disaster for Argentina,” he said. “What the Kirchner administration does not realize is that this will affect the cost of capital for a very long time.” He believes that Argentina’s credit rating could stay low for a number of years as a result of the exchange.
Molano does have some good new news for investor though. In his latest research piece, he suggests that despite the unfairness of the Argentine offer, there is a great deal of upside to the bonds based on current valuations and technicalities. One reason is a lack of Argentine paper. The government does not have to pay back its first bond until 2033. In addition, the country’s future financing needs are non-existent. This creates a scarcity premium for the Latin nation’s paper.
Another reason is a potential ratings upgrade for Brazil this year. If that happens, Molano suggests that Brazilian spreads could tighten by at least 100bp. "Logically, Argentine bond spreads would follow in their trail,” he says. “Therefore, the attraction of the Argentine bond swap improves dramatically.”
He reckons that the bonds could provide 25% of upside over the next year, “making them one of the most attractive bonds in the market.”