Saturday, 11 June 2016

After 15 Years, a Bond Trade Now Pays Off

Some traders go short. Others go long. Paul Singer went really, really long.
His trade, which is transfixing Wall Street this week, has been one of the most drawn-out and contentious bond-market sagas ever. But thanks to a settlement this week, Mr. Singer’s nearly 15-year-old wager on Argentinian government bonds has yielded $2.4 billion, including over $100 million for lawyer fees and other considerations, a gain of roughly 10 to 15 times its original investment.
Mr. Singer’s Elliott Management Corp., a New York hedge fund that manages $26 billion, began the investment in the early days of George W. Bush’s first term.
At the time, an Elliott portfolio manager named Jay Newman was looking for an angle on Argentinian debt, then trading at about 20 cents on the dollar. Elliott reckoned it might take a few years for the investment to pan out.
But it was only this Sunday that Elliott reached a final agreement with Argentina’s new government to end what officials once had portrayed as a coercive assault on the country’s pride and finances.
The country agreed in principle to pay $4.65 billion to Elliott and three other hedge funds to settle their claims on the country’s defaulted debt, according to Daniel Pollack, a mediator charged by a U.S. judge with overseeing settlement of the dispute.
The investment, which outlasted five Argentine presidents, was all that occupied Mr. Newman, friends said.
“He wasn’t going to give up,” said one friend. “There was a Moby-Dick and Ahab quality to it.”
Meanwhile, a U.S. District Court judge on Wednesday moved to allow Argentina to re-enter debt markets against the pleas of smaller bondholders.
“The only way to get the economy growing again is with credit,” Alfonso Prat-Gay, Argentina’s finance minister, said this week. “We are closing a chapter that Argentina should never have had in its history.
Mr. Newman, a 64-year-old lawyer who joined Elliott in 1995, originally saw several ways to make money from Argentina, according to someone familiar with his thinking: If Argentina’s economy improved, the bonds would gain in value. If the nation defaulted, Elliott would join a creditor committee, as in any restructuring, and push to profit from a debt restructuring.
The bonds featured strong clauses that seemed to ensure all creditors would be treated equally in the event of a default, reassuring Mr. Newman and his fund.
Outside attorneys sometimes disagreed with Mr. Newman’s analysis, but Mr. Singer backed him. Mr. Newman previously scored big betting on distressed Peruvian bonds that had similar protections.
When Argentina defaulted in 2001, its leaders quickly rejected the idea of negotiating with creditors, a blow for Mr. Newman.
Years of wrangling ensued and by 2005 the nation succeeded in pressuring about 75% of holders to exchange bonds for new ones valued at just 30 cents on the dollar.
The deal was seen as a take-it-or-leave-it offer from Argentina. The country coupled the offer with a new law making it illegal for holdouts to ever get paid, a tactic that convinced most investors to accede to the government’s demands.
But Mr. Newman didn’t take the offer, arguing the bonds’ clause meant Elliott eventually would get a better deal through negotiations.
Mr. Newman’s confidence appeared misplaced in the aftermath of the 2008 financial crisis, when the bonds traded for just pennies on the dollar. He rode horses at his New York estate to unwind, said one friend.
Paul Singer’s Elliott Management began the investment in Argentinian debt in the early days of George W. Bush’s first term.
Paul Singer’s Elliott Management began the investment in Argentinian debt in the early days of George W. Bush’s first term. PHOTO: LUCAS JACKSON/REUTERS
Mr. Newman became the public face of Elliott’s investment. While Mr. Singer is known for his outspoken politics and colorful investor screeds, Mr. Newman took a more conciliatory tone, hoping Argentine officials would come around.
“Jay Newman led the charge for 13 years. At times, it consumed him,” said David Tawil,who knows Mr. Newman and is president of New York hedge fund Maglan Capital LP, which makes investments in Argentina.
In 2009, Mr. Newman flew to Argentina to negotiate a deal, but nothing emerged. At one point, he worried that “they would send him into a dark cell,” said someone involved in the negotiations.
By 2010, 93% of bondholders had exchanged debt valued at 30 cents on the dollar. But Mr. Newman stood firm, arguing in court papers that Elliott was entitled to full payment on the bonds. Elliott resorted to extraordinary measures. In 2012, it persuaded a court in Ghana to seize a three-mast Argentinian navy ship with 200 people on board, when it docked in the country. An international court ordered Ghana to release it two months later.
Two years ago, the hedge fund sued unsuccessfully in California to prevent Elon Musk’s SpaceX from launching a pair of satellites for Argentina.
The moves only antagonized Argentina. The nation’s president at the time, Cristina Fernández de Kirchner, refused to negotiate. Mrs. Kirchner called Elliott and other holdout creditors “vultures” and “economic terrorists.” Posters of vultures were plastered across Buenos Aires calling on Argentines to choose between supporting their country or the menacing scavenger.
Elliott gained the legal upper hand in 2014 when the U.S. Supreme Court denied Argentina’s final appeal of a U.S. District Court ruling prohibiting it from paying interest on the exchanged bonds without also paying the holdouts. If it couldn’t pay existing bondholders, Argentina wouldn’t be able to raise any money selling new debt, a blow to the struggling economy.
That July, Axel Kicillof, Argentina’s minister of the economy at the time, told Mr. Newman and a roomful of investors they would “never get” more than 30 cents on the dollar for the bonds, according to people familiar with the matter.
The next day, Argentina defaulted again, this time on the bonds that investors had received in the 2005 and 2010 swaps.
But last year’s election of President Mauricio Macri gave Mr. Newman and his colleagues new hope. Mr. Macri made resolving the long-running dispute a priority, so it could access global financing markets.
On Feb. 18, Mr. Newman and other hedge-fund creditors met with Argentine negotiators at the New York offices of the mediator. After more than eight hours, the two sides agreed on the key terms of the deal.
“Oh my god,” exclaimed Jonathan Pollock, Elliott’s co-chief executive officer, when the deal was sealed.
He raced around a long table to shake hands with Argentine representatives, as fellow creditors embraced. “We have a deal.”

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