2/3: Understanding Distressed Sovereign Debt: The Restructuring of Argentina’s debt as a case study.


Quick Sidebar: Vulture funds buy distressed debt, companies and securities. They prefer to buy, from original owners, debt that has no chance of being paid back or even if it is paid back will be done on vastly inferior terms. Then they use legal rigmarole to get the full amount.

This was exactly what Elliott had done. It sensed the opportunity when Argentina refused to pay back. It bought the Argentine bonds from the original investors at a deep haircut and was planning to force Argentina to pay the full amount of the bond. The timeline looks something like this: Argentina issued the debt ($100 bil) in the 90s. Some investors bought the bonds. Argentina defaulted in 2001. Elliott bought the debt from the original investors at a discount. When Argentina was looking to restructure, it was now dealing with Elliott, not the original investors

So, Elliott Management refused the offer. It had bought the bonds from the original investors at a very low price-something like $132 million. But the bonds were worth something like $1.3 billion. Elliot did not agree to the restructuring because it wanted the entire $1.3bil. A 70% restructuring (remember, 30 cents for every dollar) meant it would get “just” $390 mil.

Quick Sidebar: It’s important to understand that this wasn’t Elliot’s first tussle with distressed government debt
1. Congo- Elliott bought $32 million of Congolese debt (again at a deep discount) and got courts to force Congo to award it $100 million (actual value) in restitution.
2. Peru-Elliott bought $28 mil of Peruvian debt (again at a deep discount) and through extensive litigation was awarded $58 mil (close to real value). Elliott’s other activist conquests include Samsung, Twitter, AT&T, AC Milan, Softbank. You are starting to get the picture.

So, it was not going to put up with Argentina’s naughtiness. It began a very nasty and expensive case against Argentina. Every contract (or in this case bond agreement) has a clause indicating under which laws the covenants (bond covenants are like the terms of the debt, similar to the loan terms you agree to when you go to the bank for money) of the bond are to be contested and settled. Argentina and its creditors chose the US. But suing a country is no picnic. Elliott made the first move. It tried to seize the presidential jet but Argentina caught wind of it and grounded it. But Elliot was not giving up. It tried to grab Argentine art on sale in Germany but again failed to do so. Then Elliott decided to go after Argentina’s foreign reserves. But countries have sovereign immunity against those asset seizures. So, Elliott began looking for assets unsecured by sovereign immunity. And it found it here. In Ghana. Argentina had docked a naval vessel in Tema. Elliot quickly filed an injunction in a Ghanaian court to seize the ship until Argentina paid back a specific sum. They won. But Argentina took the case to the UN, who overturned the decision.

Cont’d here: https://medium.com/@samuelkwesiamankwah

I write about finance and business;life-long learner