The moribund market for securities tied to Argentina’s economic growth is roaring back to life.
The GDP warrants, which pay out when certain growth thresholds are met, haven’t delivered a penny to investors since 2012 and aren’t expected to anytime soon. But they more than doubled earlier this month after a US federal court ruled the government must show how it calculated disputed gross domestic product data at the centre of a legal battle being led by hedge fund Aurelius Capital Management.
The ruling compels Argentina to reveal the methodology it used to measure economic activity in 2013, when Aurelius and the other funds that have since joined the lawsuit argue the government underreported growth to avoid having to pay the orders. Stocks rose to a near two-year high, despite the fact that anyone not part of the lawsuit would not benefit from a favourable ruling. Instead, speculation is that the court order will expose the government's nefarious manoeuvres and force it to hand over money to investors.
The revival of the securities comes after a long and contentious history that began when they were originally offered to creditors as a sweetener for last-minute deals in Argentina's 2005 debt restructuring. Investors at the time were confused about how to value the instruments, in part because of complex and ambiguous rules about exactly when they would pay out. While the warrants were designed in the spirit of wealth sharing when Argentina experienced sustained growth, they have become a headache for both the government and holders.
"Warrants have been used successfully in other restructurings such as in Ukraine or Greece, but Argentina's warrants were very poorly drafted," said Alejo Costa, BTG Pactual's chief Argentina strategist in Buenos Aires. "It's not clear how someone is supposed to calculate GDP figures."
That confusion has contributed to huge price swings for the securities, which peaked at US$19 in 2011 before falling to US$0.38 late last year. After the recent rally, New York-legal notes have recovered to around US$1.
The coupons only pay investors when the economy grows by more than a GDP benchmark, meaning Argentina needs a period of sustained expansion to trigger payments. The conflict with Aurelius arose from a change made under former president Cristina Fernandez de Kirchner, who in March 2014 changed the base year for the data from 1993 to 2004, reducing growth in 2013 to three percent, almost half the previously forecast pace and below the level that would trigger a payment on the guarantees. Aurelius says that in 2013, Argentina should have incorporated 1993 data into its base calculation of real GDP expansion.
Aurelius argued that the changes deprived its funds of about US$172 million in payments and, with interest, it is now owed more than US$253 million, court documents show. Aurelius officials declined to comment for this story.
Argentina's lawyers did not respond to a request for comment and the Economy Ministry declined to comment. The nation has said in court documents that it made all required payments linked to the court orders, totalling nearly US$10 billion.
The lawsuit brings back memories of the 13-year legal saga over the nation's US$95-billion default in 2001, when Aurelius and founder Mark Brodsky fought side-by-side with billionaire Paul Singer's Elliott Management Corp, his former employer. The country defied court orders to pay the plaintiffs and locked it out of the capital markets for years. A settlement was reached in 2016, which was largely a victory for hedge funds.
The language in Argentina's guarantees may have been left intentionally vague to give the government discretion over how to calculate GDP, according to Mitu Gulati, a law professor at the University of Virginia who specialises in sovereign debt contract law.
"Regardless of what the contract actually says, the question is whether Argentina's behaviour violated the implicit terms of the contract, which is that everyone must act in good faith," Gulati said.
Argentina has been posting such low growth figures that its warrants have not triggered payments in a decade. The economy has not grown more than three percent in a year since 2011, nor has it expanded for two consecutive years in a decade. Although GDP is forecast to grow by about 10 percent this year and about 2.2 percent in 2022, analysts say it will not meet the thresholds for warrant payments in the near term.
Using one method of calculation, Argentina would need to grow at four percent for four years in a row for guarantees to start paying out again, and even then it would only pay about 20 cents apiece, down from more than US$6 in 2011, according to Javier Casabal, fixed-income strategist at AdCap Asset Management in Buenos Aires. Using another calculation, Argentina would need four years of 7.75 percent annual growth to start making payments, he said.
The rise in prices appears to be linked to speculation that Argentina will be forced to return to the negotiating table to rewrite the rules in a way that benefits investors. Because simply holding the guarantees will not automatically generate a payout for those who did not join the lawsuit, the market will not find a price for the notes without knowing more about what the tribunal will decide, according to BTG's Costa.
"We're talking about litigation that helps those who are already suing, but no-one else," he said. "It's very hard to pinpoint the value of these things."
by Scott Squires, Bloomberg