On Sunday, advertisements from the Argentinian government
appeared in several major U.S. newspapers. The beleaguered country
stepped up its game against hedge fund investors asking US courts
to facilitate "fair and balanced" discussions to resolve the
deadlock over debt payments. As things stand, Argentina is headed
for a sovereign default, a virtual replay of the events of 2001.
First Sovereign Default
In late 2001, Argentina suffered the largest sovereign default in
history at the time. The amount was close to $100 billion and the
country experienced a virtual evacuation of all foreign capital
over the next two years. The situation was resolved through large
scale debt restructuring.
The majority of bondholders accepted a government offer to exchange
older bonds for newer issues, worth only a fraction of those issued
earlier. An economic recovery and the new terms of debt repayment
helped the government tide over the crisis over the following
Holdouts or Vulture Funds
However, a small fraction of bondholders, around 8%, refused to
accept the terms of the two bond swap transactions of 2005 and
2010. They continued to hold the older bonds which ended up with a
group of investors who "held on" to obtain greater value.
Others refer to such bondholders as "vulture funds". These are
hedge funds or venture capital funds which purchase public debt of
entities whose financial positions are precarious. In the
Argentinian case, these investors have bought sovereign debt at a
low price and are willing to undertake the cost of litigation to
obtain the full value of these bonds.
Judgment and its Implications
The plaintiff in question is NML Capital, the largest of such
"holdout" bondholders. This company is a subsidiary of Elliot
Management Corporation whose CEO Paul Singer wants Argentina to pay
the full value of these bonds. NML Capital had purchased the
majority of these bonds at very low prices from secondary markets.
These purchases were made when the country was already in serious
Last Monday, the US Supreme Court declined to hear an appeal made
by the Argentinian government against a lower court ruling. The
Second Circuit Court in New York had ruled in favor of NML Capital.
The judgment itself does not mean that NML Capital will get paid,
but it has other, more serious implications.
The ruling will indirectly force Argentina's hand. The country has
to pay the "holdout" bondholders an initial amount of $907 million
by June 30. If it fails to do so, it will be unable to use the US
financial system to pay those who had agreed to the initial debt
restructuring exercise. While, debts owed to the "holdout" group
amount to around $1.5 billion, the second group is much larger and
their bonds are worth $24 billion.
The country's options are extremely limited. Firstly, it can pay
the initial amount to the likes of Elliot which would be
politically unfeasible for Argentinian President Kirchner. Much of
her credibility rests on the success of the debt restructuring
exercise, following the default of 2001. The payment would also
lead to the country running out of a large chunk of its foreign
The second option is to default once again. Even though this move
will be a consequence of the ruling, the effect would be identical
to that of 2001. The country would once again be starved of foreign
investment, delivering a body blow to a weak economy.
Settlement in the Cards?
Argentina changed its tone on Monday, asking U.S. District Judge
Thomas Griesa for more time to reach a settlement with the group of
hedge funds led by NML Capital Ltd. Judge Griesa has appointed
Daniel Pollack to oversee negotiations between the Argentinian
government and the plaintiffs.
Meanwhile, reports have emerged that Elliot Management is willing
to negotiate with Argentina. Further, there are indications that
the company may accept bonds or a mix of cash and bonds as payment.
The company is evaluating agreements concluded between Argentina
and other creditors to arrive at a possible model for a settlement.
Stocks in Focus
Argentina's stocks and bonds registered gains on Monday following
the request made to Judge Griesa. The country's Merval stock index
gained 8.4%. However, we haven't heard the last word on the matter
and the risk of a sovereign default continues to plague Argentina.
The country's economy contracted by 0.2% in the first quarter of
2014 following a 1.4% expansion in the fourth quarter of 2013.
Inflation is rising and a default could only weaken a beleaguered
economy even more. We now examine certain stocks which may be
significantly affected in case of a sovereign default.
BBVA Banco Frances S.A.
) is a full-service banker offering both financial and
non-financial services. It has a network of more than 25 branch
office focused on middle market businesses and 239 branch offices
focused on retail customers. Seven offices are dedicated to
servicing institutional and corporate customers.
Financial institutions are the first to feel a systemic shock such
as a credit default. However, the company has strong fundamentals
and has gained more than 75% year to date. Following reports that
the dispute between the Argentinian government and creditors may
soon be resolved, the stock gained more than 6.6% on Monday.
BBVA Banco Franc holds a Zacks Rank #1 (Strong Buy). The forward
price-to-earnings ratio (P/E) for the current financial year (F1)
is 7.10 which makes it an excellent value proposition.
) is an integrated oil and gas company. It has a dominant position
in Argentina's exploration, production, refining and marketing
sectors, as well as a growing presence in petrochemicals. In 2012,
the Argentinian government acquired a majority stake in the
company, a move criticized by analysts and investors alike.
However, YPF reached a $5 billion settlement with Spanish oil giant
Repsol. This ended a two-year long dispute and also restored
Argentina's standing in the international community to a certain
extent. Despite the settlement, YPF is a nationalized company and
its fortunes are tied closely to that of the nation itself.
Currently the company holds a Zacks Rank #3 (Hold) and has a P/E
(F1) of 14.88, compared to an industry average of 17.
Grupo Financiero Galicia S.A.
) is a financial services holding company. It offers a wide range
of financial products and services to large, small and medium
business as well as individuals. It offers credit cards and
consumer finance across Argentina.
Like BBVA Banco,this company may also be one of the first to feel a
systemic impact. It may also be investigated for forex transactions
performed on a specific day when the peso lost 12%. However, it is
a market leader and these accusations are as yet unfounded.
Apart from a Zacks Rank #3 (Hold), the company has a P/E (F1) of
6.71, compared to an industry average of 12.10.
Possibly, the most important implication of this judgment is that
the corporation can triumph over countries. This has serious
implications for further debt restructuring exercises. The IMF
could play a crucial role in ensuring that a dispute mechanism
system is put in place so that such standoffs are avoided in
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YPF SA D CV ADR (YPF): Free Stock Analysis
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