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Who the bondholders are
La Nacion
January 23, 2010

In the delayed swap, the government has to seduce the big funds, the vultures and the small investors.

Florencia Donovan
LA NACION

Investors, bondholders, creditors, holdouts, speculators, vultures, or "rats from Riachuelo" as President Cristina Kirchner recently baptized them. There is no single label for the "holdouts", i.e., the investors holding bonds that have been in default since 2001, who rejected the 2005 debt swap, which would have required a capital haircut. From the mildest to the most combative, the Government knows it must convince as many of them as possible to participate in the new and delayed swap which, under the best of circumstances, will take place in mid-February.‪‪

According to data from the Economy Ministry, Argentina has unpaid bonds in the amount of $20 billion ($29 billion if you consider unpaid interest). Only if it settles its relationship with these creditors will it be able to access international credit markets, after a year (2009) in which for the first time in seven years it ran a fiscal deficit. The markets are not abstract entities that move irrationally, but rather are made up of billions of individuals and large investors that hand over their money in exchange for a promise to pay.‪‪

Juan M., 55 years old, worked in the financial sector. When he bought $75,000 in Argentine global bonds in 2000, he didn't imagine that the country could fall into default; at the time they were saying that sovereign bonds were one of the most secure long-term investments: "A company can go bankrupt, but not a country" was the argument that prevailed in those days. But for the last eight years he has bonds on his hands that are yielding him nothing. Now resigned, he recognizes that he would be inclined to participate in a debt swap. "The question that one has now is not how much you can gain but how much you are going to let yourself lose," said this bondholder, who did not want to participate in the 2005 swap operation that was offered by then-president Nestor Kirchner and his Economy Minister, Roberto Lavagna, considering it "miserly."

The situation of those who today hold bonds is extremely varied. There are not many Argentines who still hold defaulted bonds. The swap that took place under the Kirchner administration had an acceptance rate of almost 86% among the local population (compared with an average rate of 76% internationally). It is estimated that barely $60 million is still in the hands of individual investors in Argentina (registered at the Caja de Valores, the local depository.)‪‪

Of this total, few investors can say that they are the original holders (or that they bought the bonds before the default.) Santiago B., a 36 year old lawyer that used to work in a multinational corporation, is one example of those who, speculating on a recovery or a new swap offer, bought fixed yield bonds when the market plummeted after 2005. It wasn't a bad business deal: he bought US$30,000 of the BONTE 02's when they were trading at less than 25 cents on the dollar, and today they are quoting at US$40. According to estimates by the Bank of America/Merrill Lynch, the Government could offer to pay around 51 (or 44, if they don't recognize the dividends that the GDP-linked coupons were paying, that were offered in 2005). Thus the swap would not be a bad option for those who bought their bonds after that year (i.e. 2005). As days go by and market conditions worsen (because of the weak international recovery and the crisis at the Argentine Central Bank), the offer is losing its attractiveness.

Horacio Vazquez, founder of the Association of Those Harmed by Pesification and Default (ADAPD), warns that there are two very diverse positions among local investors. Those who hold bonds that were issued under Argentine law, such as the BONTES and BOCONES, have no other option than to enter the swap since the Supreme Court ruled in 2005 in favor of the default in the Galli case; thus there is little margin for them to hope for some legal recourse.‪‪

The case of the investors holding international bonds such as the Global bonds is different because many can count on various legal decisions in foreign courts in their favor. As of November 2009, the New York judge, Thomas Griesa, had ruled in favor of bondholders in 104 cases initiated by individual bondholders, for a total of US$6.5 billion, and had certified class actions for another US$2.2 billion, according to the documentation that Argentina submitted to the Securities and Exchange Commission in the US. It is clear that positive rulings for the creditors have not been translated into attachments: that is, no one has collected anything as of now. "I have a lawsuit with a favorable decision in Griesa's court. I am not ever going to enter the swap, although the decision is from 2006 and Argentina has not paid one peso, either to me, or to anyone," said Vazquez.

In every swap, explains Eugenio Bruno, a lawyer and the author of the book "Default and Debt Restructuring", the investors weigh the financial and legal aspects. "The first depends on the prices of the bonds. In this case, the market considers that the offer is attractive. But the other aspect is the legal issue: to the extent that attempts at attachments don't turn out successfully, the people who are speculating in the expectation of making some legal claim have an incentive to enter the swap. When an attachment is successful, this influence vanishes." Thus, the importance recently of the Central Bank being able to reverse the attachment over its funds in New York. While only US$1.75 million was at stake, it would have set a dangerous precedent right before the debt renegotiation.

The financial and legal logic is valid for individual investors and for large institutions, who today have the largest amount of defaulted debt. "We can't know with scientific certainty, but since 2005 there has been a very large transfer of bond holdings from retail to institutional investors" said a market source. Today there are some US$15 billion (more than half the defaulted bonds) in the possession of institutions, according to the estimates of official sources. Of this total, the three banks that are advising the government on the exchange, Barclays, Deutsche and Citi, have already signed a memorandum of understanding with funds holding between US$8 to 10 billion.‪‪

Among these institutions, Argentina can count on some allies, like the Gramercy and Greylock funds that have begun to be identified as "anchor investors" because they have taken an active role in getting the exchange reopened and in promoting the participation of others. "In 2005 there were risks associated with the transaction that impeded some investors from participating," said Robert Koeningsberger, partner at Gramercy, justifying the rejection of the exchange that year.‪‪

The "no's" and the "maybes"

"‪‪At the other extreme, the hardliners, there are investors with $2.5 billion. These are the vulture funds whose strategy is to buy the bonds at default prices and then go the legal route to obtain 100% of the bonds' nominal value. The most visible of these are NML, belonging to Elliott Management, and EM Ltd, belonging to Kenneth Dart.‪‪

The "vulture funds" (or the "rats of the Riachuelo" according to the President) are the ones responsible for the most impactful attachments. And they have a history that goes beyond Argentina. In the 90's, Peru was stung to the quick by Elliott in the restructuring of the Brady bonds. Elliott blocked funds that would have served as collateral for the new bonds, and Peru was forced to arrive at an out-of-court settlement with the fund, in order to complete its debt swap.‪‪

The American Task Force Argentina Group (ATFA) is a lobbying group that represents Elliott and other institutional investors in the US (from unions to funds such as GMO or Montreux Partners). The former number three in the National Security Council of Bill Clinton, Nancy Soderberg, is copresident of ATFA. In an interview with La Nacion, she confirmed "Argentina should deal with the debt problem and conform to the norms of international markets. There are many assets that could be attached if Argentina tries to return to the market without an agreement with the holdouts."‪‪

However, Italy is the great unknown for the swap. Argentina has retail investors in Germany, the UK and Japan, but the greatest number can be found in Italy. It is estimated that there remain 200,000 small savers who did not accept the 2005 swap, of which some 180,000 are represented by Nicola Stock and his Task Force Argentina (TFA, an association that is a part of the Italian Bankers Association, ABI). The remaining holders, represented by lawyers from various associations that defend consumer rights, have initiated suits against Italian banks, found guilty in the majority of cases for recommending Argentine bonds as a safe investment.

"The expectations among the small savers of a new swap? Little or nothing. At this point, after the way Argentina has acted, nobody has their hopes up," said Angelo Castelli, who holds the record for suits won against the Italian banks. Stock says that if the new offer that the government makes is worse than the one in 2005, he will advise his clients who, he says, hold $4.5 billion not to participate in the swap and to continue with the case that is before the World Court arbitral tribunal, ICSID.‪‪

The Government hopes to get an acceptance rate of at least 60%. The vultures hope that as many bondholders as possible enter the swap, so as to increase the possibility of achieving some out-of-court settlement for a higher amount, in spite of the fact that the conditions under which the bonds are issued would prohibit that. Individual bondholders, many of whom are tired, only want to recover their investment. There are many interests, and the negotiations have only just begun.‪‪

With the collaboration of Elisabetta Piqu , in Rome

The voices of the creditors
NANCY SODERBERG
Co-president of ATFA

* Who she represents: institutional investors in the U.S., from labor unions to vulture funds.

* "It is not realistic to offer a swap with worse conditions than those of 2005, it's not going to work. Argentina has the money, at least $40 billion in reserves. It doesn't want to pay."‪‪

NICOLA STOCK
President of TFA

* Who he represents: 180,000 small investors in Italy, with up to US$4.5 billion.

* "How do [my clients] feel about it? From the responses I'm getting from our bondholders, they are extremely negative. So negative that a few days ago they went out and demonstrated."

HORACIO VAZQUEZ
Co-founder of ADAPD

* Who he represents: small Argentine investors.

* "Argentina never disputed the reasonability of what it owes. What it's doing is making unilateral offers of what it wants to pay at each moment. In 2005, the main part of the local swap was approved by the AFJPs."

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