Argentina has a less than stellar reputation when it comes to economic stability, but a significant ruling in a New York courtroom opened the way for a bond issue that defied expectations in both speed and yield. Offering a guiding hand on the deal was JPMorgan.

JPMorgan team of the month

It is a topsy-turvy world, even in the bond market. For generations of investors in sovereign debt, ‘Argentina’ has been synonymous with ‘default’. The country’s history of not paying its debts goes back to 1828, and it has been locked out of the international bond markets since its second-last default in 2001. Yet its comeback issue in April broke every record for emerging market bonds. The team from JPMorgan was there.

This particular chapter in Argentina’s history of oscillating fortunes began in 2001, when it defaulted on $81bn of its debt, the largest default in history. Shortly thereafter vulture funds could, and did, buy the distressed bonds for 20 cents on the dollar or less. Bond exchanges in 2005 and 2010 restructured 92% of the debt, but a group of diehard funds refused to settle, holding out for a higher payout.

In 2014, the holdouts won a New York court ruling preventing Argentina from paying out the restructured bondholders unless it also paid them. Argentina chose to default yet again (for the eighth time in its history).

Then came a change of government. Centre-right, pro-business outsider Mauricio Macri was elected president, taking office in December. “We were pleased when he announced a very good technical, professional team at the Ministry of Economy,” says JPMorgan CEO for Latin America and Canada, Martin Marron. “Almost none of them had been a politician before. And we were more pleased when they quickly took the bull by the horns and sent a team to New York to deal with the holdouts.”

Cometh the man

Mr Macri transformed expectations for the struggling Argentine economy. He allowed the peso to float, whereupon it promptly lost one-third of its value. He ended currency controls. And in March he secured the agreement of four holdouts to a cash settlement.

The holdouts had been demanding bonds paying 11%. Mr Marron reckons that getting them to agree to cash was the most important win of the negotiations. “If Argentina had given them bonds, they would have had the upper hand,” he says. “They would have managed the time when the bonds went to the market, capturing the tightening of the spread.” By issuing at 7%, Argentina saved itself 400 basis points, according to Mr Marron.

Before it could offer cash, however, Argentina needed to know it would be able to get its hands on some. With all its social, political and economic challenges, could it return to market after 15 years and raise enough money? “They consulted JPMorgan and we said yes, you can get $15bn from the market,” says the bank’s head of Latin America debt capital markets, Lisandro Miguens, who played a prominent role in the transaction. “So they started negotiations able to talk cash, which was an important negotiating tool.”

There was still a New York injunction barring the way, however. If Mr Macri’s arrival on the scene was changing views of his country’s economic future, it certainly changed the attitude of the judge who ruled in the holdouts’ favour back in 2014. In April this year, the same judge lifted the injunction barring payments to the restructured bondholders, letting it be known that he had been moved by “changed circumstances” in Argentina. “Changing the narrative with judge Thomas Griesa and special master Daniel Pollack was critical for the success of the deal,” says Mr Miguens.

That finally opened the way for a bond issue. The speed with which this 15-year-old problem was approaching resolution was taking everyone by surprise. “The investors’ view had been that it might take place by the end of this year,” says Jonas Knoll, JPMorgan’s head of emerging markets syndicate New York.

At a discount

Mr Miguens adds that the bond issue defied expectations in other ways. Insiders said, for example, that Mr Macri would not be able to pass the laws required for the settlement to go ahead because he lacks a majority in the National Congress. They were passed at the end of March.

The discount achieved on the holdouts’ claims was also a pleasant surprise. “Argentina got a discount of about 40%  of the value of the claims, which was larger than anticipated,” says Mr Miguens.

The mandate for the upcoming issue, which by now had the undivided attention of the emerging market investment community, went to Deutsche Bank, HSBC, JPMorgan and Santander.

JPMorgan and Argentina go back a few years. It was 1948 when JPMorgan first opened a branch in the country, and it now employs 400 people locally. That will rise to 1000 by the end of next year as the country becomes a technology, operations and financial hub covering the rest of the world, according to Mr Marron. The bank chose Argentina because of local talent, English language skills and, compared with the rest of Latin America, reasonable labour laws.

This commitment to Argentina, and the bank’s underwriting reputation, no doubt helped to secure the bond mandate. Also valuable was its $1bn participation in a $5bn loan to Argentina’s central bank in January, alongside banks such as HSBC and Santander.

Speedy issue

Argentina now wanted to get moving and settle with the holdouts as soon as possible, as a cornerstone of what would become the new economy. “Some said the only way was to do a local deal,” says Mr Miguens. “We managed to do a public offer outside Argentina, under New York law, very quickly. And we did it in 45 days.”

International investors liked the idea of Argentina coming back to market. It was an opportunity to invest in an improving situation at what they expected would be a generous yield. There is no other country quite like Argentina in the Latin American or emerging market universe, which means diversification, always a plus for investors.

But this was, after all, Argentina, defaulter of legend. Some investors said they would not invest at less than 10%. Others advised Argentina not to ask for any more than $8bn. However, $12.5bn would be needed if all the holdouts signed up (though, in fact, the offer has now been taken up to the tune of $11.3bn). So the original issue size envisaged was $15bn, which would raise some extra cash for the government.

Roadshows, which began two days before the New York judgment, were held in London, New York, Boston, Los Angeles and Washington, DC. They attracted more than 350 investors, the first of a number of emerging market records. The bankers say that the Argentine team communicated very well, and investors appreciated the fact that, as private sector types, they spoke the same language. The transaction was announced the following week, in maturities of three (added by popular demand at the last minute), five, 10 and 30 years.

Argentina’s manoeuvreability was at the mercy of legal procedure. So it was very lucky with its timing, which coincided with a recovery in emerging market sentiment. Commodity prices, on which so many emerging markets depend, have been looking perkier since March, while US dollar rates have remained low.

No disruption

The issue was a triumph, pulling in orders worth $69bn, another record. The size was duly increased to $16.5bn, making it the largest bond ever priced by an emerging market issuer. “This was the most important transaction of my career,” Mr Miguens says, simply.

There had been speculation that holdouts of holdouts would try to disrupt the deal. “But Argentina managed to settle with approximately 85% of them, and no disruption was attempted,” says Mr Miguens.

The 10-year bond was the main attraction, drawing orders of more than $25bn before its yield was tightened from 8% to 7.5%. The 30-year yielded 8%, down from 8.85%, while the three- and five-year bonds yielded 6.875% and 6.25%, respectively. All have since traded up, though at the time of writing it remains to be seen whether they will be included in JPMorgan’s influential emerging markets bond indices.

“The order book showed how much cash there was on the sidelines,” says Mr Marron. “And that opens the door for other issuers.” So it has proved. The Argentine provinces of Neuquen and Mendoza visited the debt capital markets shortly after.

“It’s also promising for countries such as Venezuela and Cuba,” says Mr Knoll. “It shows that if they have the right political team, and if investors can see a path to recovery, there is money to be invested.”

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