The Ugly But Profitable Business Of Defaults

Reading up on this Argentina debt deadlock and one wonders whose side are we on ?

On one hand, we have a pretty recalcitrant, and probably corrupt, country that does not appear to have got its act together after so many chances and high hopes in between.

And on the other hand, we have a greedy hedge fund who was not even affected by the default but who had bought the debt at highly distressed levels from the open market and then lobbied, sued and won the case to be paid in full, making, presumably,  several hundred percent returns.

The Argentinian default occured in 2002 but it took them up to 2005 before a restructuring package was worked out and for those who did not take up the first package, a second package was worked out in 2010.

Out of 82 bio in defaulted bonds, only 4 bio held out for over a decade and they are to be rewarded depending on the jurisdiction of their suit for most of the EU courts had ruled in favour of Argentina.

And so this Elliot Capital (and 2 others) are screwing things up for the rest of the 78 bio restructured into much less bond holders who are due coupon payment on 30 Jun but now it seems that Argentina cannot afford to pay both at once.

This fund has also been seizing Argentine navy ships apparently in their quest for payment and supposedly long Argentine credit default swaps which are trading at 80% for 6 months and 22% for 5 years, signalling a high chance of a default in an inverted curve.

The Argentine state oil company, YPF, also came out to clarify that their assets are not sovereign and cannot be seized on a sovereign default.
(remember the barbaric manner in which the Argentine government seized YPF back from Repsol back in 2012 ? and have recently paid them 5 bio in Argentine bonds as (insufficient) settlement)

All this for about 4 bio in defaulted bonds that are holding out.

And who do we feel sorry for ?

The silent majority !

Yes. Just like the poor retail folks who used their life savings buying Bankia (once the 4th largest bank in Spain) perpetual bonds and then losing about 40% of their capital in the restructuring.

We should expect more to come with Energy Futures’ (former TXU Energy) recent bankruptcy and 50 bio in debt which will take a long, long time to sort out. Their defaulted bonds are hardly distressed, trading at 120 for the 11.75% 03/2022 paper giving their papers a average 37.4% return since the day it filed for bankruptcy on 29 April.

To make a mockery out of the losers, we had the world’s biggest junk bond offering back in April by Altice SA which sold about 23 bio in EUR and USD bonds to fund a 20 bio takeover of SFR, a french mobile unit of Vivendi.

The 8Y USD bonds that are rated Ba3/B+ were priced at a 6% coupon and are trading at 106 last.

Before you rush out to buy more junk with enthusiasm, let’s summarise the checklist of rules for success.

  • deep pockets and staying power (to hold out for years without payment)
  • strong legal backing
  • sue in the right jurisdiction (eg Greek bonds under UK law were paid out in FULL vs 75% losses for the rest)
  • strong arm tactics to seize assets like Argentine navy ships

If you possess none of the above, go read the Bankia story. And if you are not that unlucky, you could be restructured to be paid in more bonds but of lesser value.

Related Articles :

Darlings To Defaults – Behind Every Default Was Once A Good Investment

Darlings To Defaults – BUMI RESOURCES