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Argentina Reaches Deal With Hedge Funds Over Debt Argentina Reaches Deal With Hedge Funds Over Debt
(about 2 hours later)
Argentina agreed to pay $4.65 billion to four hedge funds on Monday in a deal that could put an end to a more than a decade of mudslinging and legal attacks. Argentina has agreed to pay $4.65 billion to four hedge funds in a deal that could put an end to more than a decade of mudslinging and legal attacks that had cut the country off from global financial markets.
The hedge funds, which include the billionaire Paul E. Singer’s NML Capital, are the last among of group of investors that declared legal war on Argentina in the United States 12 years ago. These holdouts, so named for their refusal to partake in Argentina’s two restructurings after it defaulted on $100 billion of debt in 2001, sought billions in bond repayments and eventually succeeded in preventing Argentina from paying any of its creditors. The agreement, announced on Monday, opens the door for Argentina to attract foreign investment needed to revive its stalling economy.
“This is a giant step forward in this long-running litigation,” Daniel A. Pollack, the court-appointed mediator, said on Monday. But, he added, it is “not the final step.” “This is the equivalent of a giant albatross being lifted from Argentina’s neck,” said Brett Diment, the head of emerging market debt at Aberdeen Asset Management. “The litigation and lack of access to international capital has had a sclerotic effect on the country for years but it was facing a real financial squeeze this year,” he said.
The four hedge funds, which include the billionaire Paul E. Singer’s NML Capital, were the last major hedge fund investors among a group that declared legal war on Argentina in the United States courts 12 years ago.
These holdouts, so named for their refusal to participate in Argentina’s two restructurings after the country defaulted on $100 billion of debt in 2001, sought billions in bond repayments and eventually succeeded in preventing Argentina from paying any of its creditors.
And they went to great lengths to compel Argentina to pay — at one point persuading authorities in Ghana to seize an Argentine navy ship as collateral, with a crew of about 300 on board. They also moved to impound other government assets, including a satellite.
Their ultimate victory illustrates the outsize influence hedge funds can have in the countries where they bet their money. And their legal tactics are likely to be used again by other investors contesting the debt obligations of sovereign powers.
The four holdout firms, including Aurelius, a hedge fund run by Mark Brodsky, a former trader at Mr. Singer’s Elliott Management; Davidson Kempner; and Bracebridge Capital, have agreed not to try to prevent Argentina from raising new money, which it will need to do in order to pay the settlements it has made.
The deal will also depend on whether Argentina’s legislature will repeal domestic laws that prevents the government from paying holdouts. The parties agreed on a deadline of April 14 to pay the settlement.
The settlement will be extremely profitable for the hedge funds. Martin M. Guzman, a postdoctoral research scholar at Columbia Business School, has estimated that NML paid $48 million for some bonds it bought in 2008 and with the deal it will receive approximately $620 million for those bonds — an annual return of about 38 percent over eight years.
For Mr. Singer, who has supported Republican candidates and gay marriage, principle was as important, if not more, than profit, in pursuing a nearly 15-year fight.
“By being a country that scoffs at the rule of law, they sacrifice so much,” Mr. Singer said in a recent interview. NML’s investments in Argentine debt and other sovereign debt represented less than 2 percent of the $26 billion in assets that his hedge fund company, Elliott Management, manages over all, he noted.
A spokesman for Elliott said on Monday that the firm was “pleased to have reached an agreement.”
Pressure had been growing on the holdouts to settle with Argentina after its newly elected president, Mauricio Macri, moved quickly to settle with other bondholders. His government struck a $1.35 billion settlement with a group of Italian investors and offered to pay $6.5 billion to the group of six hedge fund holdouts in February. Two of those firms, Montreux Partners and Dart Management, accepted the proposal.
On Feb. 19, Judge Thomas P. Griesa of the Federal District Court in Manhattan, who has presided over the lengthy legal battle, dealt the holdouts a setback by agreeing to lift an injunction that has prevented Argentina from raising new money in bond markets or pay its creditors.
“This is a giant step forward in this long-running litigation,” Daniel A. Pollack, the court-appointed mediator, said on Monday, adding that Argentina’s decision to settle was “nothing short of heroic”
The $4.65 billion represents 75 percent of the full judgments for the four hedge funds and includes principal, interest and a payment to settle the claims outside of the court, as well as “certain legal fees and expenses incurred.”The $4.65 billion represents 75 percent of the full judgments for the four hedge funds and includes principal, interest and a payment to settle the claims outside of the court, as well as “certain legal fees and expenses incurred.”
The four hedge funds, including Aurelius, a hedge fund run by Mark Brodsky, a former trader at Mr. Singer’s Elliott Management; Davidson Kempner, and Bracebridge Capital, have agreed not to try to prevent Argentina from raising new money. The deal will also depend on whether Argentina’s legislature will repeal domestic laws that prevents the government from paying holdouts.
The battle between the holdouts and Argentina reached a nadir under the previous president, Cristina Fernández de Kirchner, who called the holdouts “vultures” and “financial terrorists.”The battle between the holdouts and Argentina reached a nadir under the previous president, Cristina Fernández de Kirchner, who called the holdouts “vultures” and “financial terrorists.”
Pressure has been growing on the holdouts to settle with Argentina in recent weeks. Argentina’s newly elected president, Mauricio Macri, has moved fast to settle with other bondholders, striking a $1.3 billion settlement with a group of Italian investors. Argentina also offered to pay $6.5 billion to the group of six hedge fund holdouts. Two of those firms, Montreux Partners and Dart Management, accepted the proposal, which amounted to three-quarters of a $9 billion claim. Axel Kicillof, the former economy minister, even sought to question the impartiality of the mediator, Mr. Pollack, saying a year ago: “If he takes off his jacket you can see his feathers,” referring to the vultures.
On Feb. 19, Judge Thomas Griesa of the Federal District Court in Manhattan, who has presided over the lengthy legal battle, dealt the holdouts a setback by agreeing to lift an injunction that has prevented Argentina from raising new money in bond markets or pay its creditors. “For the first time in 15 years, we can say that Argentina has really started to exit default,” Alfonso Prat-Gay, Argentina’s new economy minister, told reporters in Buenos Aires on Monday, adding that the situation had “drowned” the economy.
That ruling is based on two conditions: that Argentina repeal its domestic law, known as the “Lock law,” that prevents it from paying the holdouts and that it makes full payments to bondholders who settle with Argentina by Monday. He attacked the Kirchner administration for refusing to settle the issue, adding that by letting the dispute fester, interest had accumulated and investors had lost confidence.
Argentina’s Congress could take most of March to debate whether to revoke the Lock law, and a decision could be expected by the end of the month, according to Sergio Berensztein, an Argentine political analyst. These lost investments and central bank reserves used to service tens of billion of dollars of debt in recent years could have been poured into the economy, creating up to two million jobs, Mr. Prat-Gay said.
In a statement on Monday, Mr. Pollack highlighted several major figures in the negotiation process, including Alfonso Prat-Gay, Argentina’s minister of economy, and Mr. Singer, who, the mediator said, was a “central figure who involved himself intensely with me over the past several weeks.” Argentina would sell up to $15 billion in bonds from April to finance the payment, he added.
Speaking about Argentina’s new government, Mr. Pollack added that “their course-correction for Argentina was nothing short of heroic.” “Argentina is joining the world in an intelligent way,” Mr. Prat-Gay said.
That nation’s legislature could take most of March to debate whether to revoke the law, and a decision should be expected by the end of the month, according to Sergio Berensztein, an Argentine political analyst.
Despite the accord, Argentina’s bonds were little changed on Monday, showing that investors had already priced in a deal.
The reverberations from the legal battle with Argentina may be felt for years to come.
In 2012, the holdout hedge funds achieved a stunning breakthrough when Judge Griesa ruled that whenever Argentina wanted to pay any of its creditors, it would have to also pay the holdouts. The move and its fallout led Argentina to default on its debt again in 2014.
That move will have far-reaching implications, many analysts say. With his ruling, the judge has laid the foundations for future investors to contest the debt obligations of other countries.
Anna Gelpern, a law professor at Georgetown University, said that the ruling created a new tool for investors.
“The tool is a kind of financial boycott” that would allow creditors to enforce equal payment in other instances, she added.
Mr. Guzman went further, saying that the settlement created “a problem of moral hazard in which this settlement incentivizes this type of behavior because it is profitable.”