Argentina defied a default to deliver some of the world’s biggest bond returns in 2014. This year, the end of Cristina Fernandez de Kirchner’s tenure as president is forecast to produce even bigger gains.
Credit Suisse Group AG and Barclays Plc recommend investors buy the nation’s foreign-currency debt securities as elections in October are likely to usher in a government that will revive the economy and repair relations with creditors. After returning 19 percent last year, the notes may advance as much as 30 percent in 2015 if the nation reaches a deal to end its default, according to Daniel Chodos, a strategist at Credit Suisse.
During Fernandez’s seven years in office, Argentina has been beset by surging inflation and a deepening isolation from international debt markets. Investors are now boosting bets a new government will resolve a legal dispute with billionaire Paul Singer’s Elliott Management Corp. that caused the country to default for the second time in 13 years in July.
“Elections will be a major market driver,” Sebastian Vargas, an economist at Barclays who has an overweight recommendation on Argentina bonds, said in an e-mail. “Any of the potential presidential candidates understands the need to tackle the country’s main economic challenges.”
Bond Clause
Daniel Scioli, the governor of Buenos Aires province, and Buenos Aires Mayor Mauricio Macri lead Sergio Massa, an opposition lawmaker, in the latest presidential polls.
Argentina defaulted after Fernandez refused to abide by an order from U.S. District Judge Thomas Griesa, who prohibited the nation from making payments on overseas debt it issued in restructurings in 2005 and 2010 until it settles with Singer. The hedge fund manager refused to accept Argentina’s offer of about 30 cents on the dollar after the country’s $95 billion default in 2001 and successfully sued for repayment.
Along with the prospect of a new government, the expiration of a key bond clause on Dec. 31 that Fernandez has blamed for preventing a settlement with holdouts has also fueled optimism among bond investors.
Argentina’s benchmark 2033 notes have jumped 13 cents in the past year to 88.3 cents on the dollar, data compiled by Bloomberg show. Argentine bonds posted the second-best returns in emerging markets after Turkey last year, and gained almost three times the average 7.5 percent for developing nations.
Credit Suisse’s Chodos predicts the extra compensation investors demand to own Argentina’s bonds over U.S. Treasuries will shrink about 5 percentage points from 7.3 percentage points if the country strikes a deal to end the default.
‘Very Attractive’
“Given lack of reasonable prospective returns in other markets, Argentina looks very attractive in 2015,” Credit Suisse strategist Daniel Chodos wrote in an e-mailed response to questions. “We expect bond prices to continue to rise as we approach the October presidential election and the central bank manages to maintain the stock of international reserves at acceptable levels.”
Chodos has recommended investors own Argentine bonds and use any sell-offs to buy more debt since Nov. 3, while Barclays’s Vargas boosted the credit to overweight from neutral in December.
Bank of America Corp. is keeping the market weight recommendation on the bonds it called in May as a weaker economy is offset by “prospects of a transition to a more market friendly government in 2016,” credit analyst Jane Brauer said in an e-mail.
Time Frame
While the next president is likely to settle with the holdout creditors, an agreement may take longer than investors anticipate, which would undermine bond returns, according to Mauro Roca, an economist at Goldman Sachs Group Inc.
“There’s a timing risk with Argentina’s international bonds,” Roca said by telephone. “The next administration will want to settle but that may take several months. The bonds aren’t getting paid so the opportunity cost is high.”
Economy Ministry Axel Kicillof said in an interview with El Destape newspaper Jan. 4 that Argentina is still offering holdouts the same terms from its 2005 and 2010 debt swaps.
Massa’s economic team is assuming it’ll be up to the next administration to negotiate with creditors as Fernandez won’t settle, said Aldo Pignanelli, a former central bank president who now runs research firm Saver in Buenos Aires and advises Massa. Massa’s proposal will likely include offering all holdouts a new bond worth less than the 100 cents on the dollar that was awarded in court, but more than the 2005 and 2010 debt swaps, Pignanelli said.
Scioli’s spokesman Juan Courel didn’t return telephone or e-mail messages seeking comment.
“Settling with holdout creditors will be a priority for Macri,” Carlos Melconian, an economist and adviser to the candidate, said in a telephone interview. “Negotiations with creditors will be in a context of a broad agenda of re-inserting Argentina in the world.”
To contact the reporter on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net Lester Pimentel
Credit Suisse Group AG and Barclays Plc recommend investors buy the nation’s foreign-currency debt securities as elections in October are likely to usher in a government that will revive the economy and repair relations with creditors. After returning 19 percent last year, the notes may advance as much as 30 percent in 2015 if the nation reaches a deal to end its default, according to Daniel Chodos, a strategist at Credit Suisse.
During Fernandez’s seven years in office, Argentina has been beset by surging inflation and a deepening isolation from international debt markets. Investors are now boosting bets a new government will resolve a legal dispute with billionaire Paul Singer’s Elliott Management Corp. that caused the country to default for the second time in 13 years in July.
“Elections will be a major market driver,” Sebastian Vargas, an economist at Barclays who has an overweight recommendation on Argentina bonds, said in an e-mail. “Any of the potential presidential candidates understands the need to tackle the country’s main economic challenges.”
Bond Clause
Daniel Scioli, the governor of Buenos Aires province, and Buenos Aires Mayor Mauricio Macri lead Sergio Massa, an opposition lawmaker, in the latest presidential polls.
Argentina defaulted after Fernandez refused to abide by an order from U.S. District Judge Thomas Griesa, who prohibited the nation from making payments on overseas debt it issued in restructurings in 2005 and 2010 until it settles with Singer. The hedge fund manager refused to accept Argentina’s offer of about 30 cents on the dollar after the country’s $95 billion default in 2001 and successfully sued for repayment.
Along with the prospect of a new government, the expiration of a key bond clause on Dec. 31 that Fernandez has blamed for preventing a settlement with holdouts has also fueled optimism among bond investors.
Argentina’s benchmark 2033 notes have jumped 13 cents in the past year to 88.3 cents on the dollar, data compiled by Bloomberg show. Argentine bonds posted the second-best returns in emerging markets after Turkey last year, and gained almost three times the average 7.5 percent for developing nations.
Credit Suisse’s Chodos predicts the extra compensation investors demand to own Argentina’s bonds over U.S. Treasuries will shrink about 5 percentage points from 7.3 percentage points if the country strikes a deal to end the default.
‘Very Attractive’
“Given lack of reasonable prospective returns in other markets, Argentina looks very attractive in 2015,” Credit Suisse strategist Daniel Chodos wrote in an e-mailed response to questions. “We expect bond prices to continue to rise as we approach the October presidential election and the central bank manages to maintain the stock of international reserves at acceptable levels.”
Chodos has recommended investors own Argentine bonds and use any sell-offs to buy more debt since Nov. 3, while Barclays’s Vargas boosted the credit to overweight from neutral in December.
Bank of America Corp. is keeping the market weight recommendation on the bonds it called in May as a weaker economy is offset by “prospects of a transition to a more market friendly government in 2016,” credit analyst Jane Brauer said in an e-mail.
Time Frame
While the next president is likely to settle with the holdout creditors, an agreement may take longer than investors anticipate, which would undermine bond returns, according to Mauro Roca, an economist at Goldman Sachs Group Inc.
“There’s a timing risk with Argentina’s international bonds,” Roca said by telephone. “The next administration will want to settle but that may take several months. The bonds aren’t getting paid so the opportunity cost is high.”
Economy Ministry Axel Kicillof said in an interview with El Destape newspaper Jan. 4 that Argentina is still offering holdouts the same terms from its 2005 and 2010 debt swaps.
Massa’s economic team is assuming it’ll be up to the next administration to negotiate with creditors as Fernandez won’t settle, said Aldo Pignanelli, a former central bank president who now runs research firm Saver in Buenos Aires and advises Massa. Massa’s proposal will likely include offering all holdouts a new bond worth less than the 100 cents on the dollar that was awarded in court, but more than the 2005 and 2010 debt swaps, Pignanelli said.
Scioli’s spokesman Juan Courel didn’t return telephone or e-mail messages seeking comment.
“Settling with holdout creditors will be a priority for Macri,” Carlos Melconian, an economist and adviser to the candidate, said in a telephone interview. “Negotiations with creditors will be in a context of a broad agenda of re-inserting Argentina in the world.”
To contact the reporter on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net Lester Pimentel
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