After the bulk of a US$135-million bond payment they were owed was blocked by a slew of new capital controls, most investors in Argentine real-estate firm IRSA were begrudgingly prepared to wait the situation out.
The nation was in the middle of another potential currency crisis, after all, and officials were rushing to implement new foreign-exchange rules in an effort to get a handle on the peso. Many were willing to give the country the benefit of the doubt, expecting policy makers to eventually tweak the rules to avoid preventing companies from repaying their obligations.
But that patience has run out. It’s been over 80 days since foreign investors were told the cash that IRSA had set aside to pay its debts couldn’t be sent to their overseas accounts due to the new government roadblocks. Over the span there have been few signs of progress toward a resolution.
In fact, government officials have signalled to holders of the debt that there’s little chance they’ll be able to wire their dollars offshore prior to December 10, when the leftist government of president-elect Alberto Fernandez is sworn in, according to people familiar with the discussions. And beyond that, the outlook is even less clear.
The mounting frustration of creditors is another dark cloud hanging over a nation that, while facing more pressing problems at the moment, will one day soon again be seeking foreign capital to revitalise a flagging economy. About US$55 million of the US$135 million was distributed to local bondholders, according to a person with direct knowledge of the matter, leaving about US$80 million effectively stuck.
“For the time being I prefer not to invest there,” said Amos Poncini, a fund manager at CBH Compagnie Bancaire Helvetique SA in Geneva, one of a handful of investors who spoke to Bloomberg after the payments on their IRSA bonds were blocked. “Even if some very interesting opportunities appear, the momentum and the operational environment is not favorable for a traditional international investor.”
Outgoing President Mauricio Macri’s decision to reinstate currency controls that had been a hallmark of the Kirchner administrations before him blindsided investors, who had swarmed to the country early in his tenure, lured by the promise of a business-friendly regime.
But the government felt it had little choice after an August vote that signalled opposition frontrunner Fernández would take the presidency led to a peso rout and fuelled billions of dollars of capital flight, threatening to drain the country’s foreign reserves within weeks. Argentina’s Central Bank tightened restrictions even further after the Frente de Todos leader's October election victory.
The current regulations, which limit dollar payments to offshore entities, including security depositories, could impact another US$1 billion of outstanding corporate debt from half a dozen companies issued under local law but offered to foreigners, according to data compiled by Bloomberg. Sovereign bonds have been exempted under a central bank resolution.
Some of the issuers have already been in contact with overseas investors about the problem, according to people with knowledge of the matter, who asked not to be identified as the conversations were private.
Yet even if they’re eventually lifted, the return of heterodox foreign-exchange controls will likely have a lasting impact on the ability of companies to access international capital markets, according to Roger Horn, a senior emerging-markets strategist at SMBC Nikko Securities America in New York.
“The market for domestic corporate bonds sold to foreign investors will remain dead for a few years -- until a new generation of emerging-market investors come around and believe that this time Argentina will be different,” Horn said.
While most of the US$80 million currently sits in local dollar accounts that money managers have been forced to set up, some investors, including Poncini, have been willing to pay a steep price to get their money out, reviving a method popular among traders during the first half of the decade known as the "blue-chip swap." It entails buying certain types of shares or bonds in the local market with pesos, and subsequently sell those securities abroad for dollars.
“There were solutions and we chose one of them,” Poncini said. “It was annoying, costly and difficult – as always with special situations – but possible.”
But the arbitrage has gotten increasingly expensive, and what’s more major holders are often prevented from circumventing currency controls due to their own internal policies. That’s resulted in the vast majority of the cash remaining stuck in Argentina.
IRSA declined to comment on the status of its bond payment, as did representatives at security depositories Euroclear and Clearstream. Argentina’s central bank didn’t respond to a request seeking comment on the status of the capital controls, while a representative for the Fernandez team didn’t immediately reply to questions about the measures’ longer-term outlook.
Macri officials are reluctant to tweak the currency controls to accommodate bondholders amid concern such actions could be construed as graft by the incoming administration, according to a money manager with dollars trapped in the country, citing private talks with Central Bank officials.
And Fernández has given little indication that he’s planning to lift the restrictions once he takes office.
“If the market-friendly administration did that, who knows” what could be next, Poncini said.
by Carolina Millan, Pablo Gonzalez & Ignacio Olivera Doll, Bloomberg