Thursday 31 July 2014
The Strange But True Tale Of Argentina's Debt Mess
It’s all here — everything from how the crisis could affect global poverty to why a New York hedge fund manager seized a three-mast sailing ship.
Marcos Brindicci / Reuters
On Wednesday, Argentina made international news by defaulting on its debt. The nation of 41 million people failed to make a $539 million payment to bondholders before a deadline, triggering a ratings downgrade, a slump in Argentine stocks, and not a little bit of panic and confusion.
Argentina has defaulted on its debt on more than a half-dozen occasions over its history. But this time it's different, because nobody knows exactly what to do or how to resolve the situation, and lots of people are concerned that this could harm not only Argentina but the whole world economy.
How did Argentina get to this place?
A century ago, Argentina was one of the wealthiest nations on the planet, and considered a serious rival to the U.S. for economic dominance of the new world. The country had a fast-growing economy, agricultural abundance, and lots of natural resources. That didn't work out too well, however. Lots of reasons for it, but the end result is that while Argentina's GDP per capita in 1990 approached that of the U.S., by 2000 it was less than a third as much.
In the 1990s, Argentina borrowed heavily, issuing tens of billions of dollars in international bonds. By 2001, amid a recession, it became clear that the country couldn't keep up with payments and, in December of that year, the government defaulted on north of $80 billion in debt. It was — and still is — history's largest default by a national government.
This had many political and economic implications, but the main one is that the country was largely cut off from international capital markets, meaning it couldn't borrow any more money — or, if it did, it had to pay very high interest rates.
Globe Turner, LLC/Globe Turner, LLC
Argentina's president, Cristina Fernández de Kirchner, was elected in 2007 and is currently serving her second and final term in office. Her husband, Nestor Kirchner, was her predecessor in the office, and he soon realized that it would be very helpful to all sorts of things if the country could have credit again. So in 2005, his government offered holders of the defaulted bonds a deal: If they'd agree to exchange their defaulted bonds for new ones worth significantly less — like as little as a 30% in some cases — Argentina would promise to pay this time. It might sound like a crappy deal, but something is better than nothing.
In 2010, President Fernández returned to the negotiating table and make a similar offer to bondholders who didn't accept the original offer. Nine years into not getting paid proved enough for a lot of them. By the time the bargaining was done, more than 92% of all the original bondholders had agreed to the exchange. And since then, Argentina has faithfully been making interest payments on the debt.
The other 8%, known as holdouts, have received nothing. And the Argentine legislature passed a "lock law" making it illegal for the country to make subsequent offers to other bondholders. Basically, the 8% who didn't take the offer were frozen out.
Jorge Silva / Reuters
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The IPO Of Bill Ackman
The hedge fund titan’s Pershing Square Capital is set to conduct an IPO later this year, but industry insiders are worried Ackman is sabotaging its potential success with his increasingly bizarre public behavior.
Brendan Mcdermid / Reuters / Reuters
A little more than a week ago, in Manhattan's AXA Equitable Center, hedge fund manager Bill Ackman delivered a bizarre three-and-a-half-hour presentation building upon the case for his Herbalife short, a $1 billion position he's spent the better part of two years and $50 million defending.
The presentation fell flat not just with the media and institutional investors in attendance — Herbalife shares gained 20%, or more than $13, over the course of the day — but also with the handful of potential early investors in the IPO of Ackman's Pershing Square Capital expected later this year. They had come to see the road show before the road show, so to speak, and left, in some cases less than halfway through the presentation, with more uncertainty about Ackman than when they'd entered the auditorium that hot Tuesday morning.
Ackman now admits that the presentation was "bad" and a "PR failure." Had it been an isolated event, it wouldn't have been so bad. But as just the latest in a series of strange public appearances, among them a televised fight on CNBC with rival Carl Icahn, two instances of shedding tears, and a barely legal move to team up with the Canadian pharmaceutical conglomerate Valeant Pharmaceuticals to acquire Botox-maker Allergan, sources said that Ackman has dug himself a deep hole out of which to climb if he is to convince investors that he is fit to lead a public hedge fund.
"I'm just not aware of any situations where someone has tried to go public and had such bizarre behavior, so that's going to hurt the IPO," said Dan Weaver, professor of finance and an IPO expert at Rutgers University.
A representative for Ackman and Pershing Square declined comment for this story.
CNBC
Ackman, it could be argued, made his personal IPO to the world in 1995 when he and a Harvard classmate launched a very public bid to buy Rockefeller Center via their Gotham Capital investment firm. Though they lost the bid, Gotham went on to amass more than $500 million in assets in its first six years by making prescient investment bets, and later shorting bond issuer MBIA, among others.
After closing Gotham and striking out on his own with the founding of Pershing Square in 2004, Ackman took on such high-profile targets as Wendy's and, no pun intended, Target. Later came activist stakes in Canadian Pacific Railroad, J.C. Penney, Borders, and Allergan, among others, some of which he publicly won big, such as the $800 million he made off of Canadian Pacific, and some of which he lost even more publicly, as with J.C. Penney, which lost thousands of jobs and his fund of $500 million under his watch.
Ackman is perhaps known best, if not admiringly, for his attacks on nutritional supplement company Herbalife, calling it a massive pyramid scheme and crying fraud over its practices of targeting mostly poor minorities with its health and weight-loss regime for the last 18 months.
In addition to Icahn, Ackman's Herbalife zeal has also pitted him against well-liked and well-respected investment banker Ken Moelis. Moelis served as an early adviser to Herbalife after Ackman took his stake, and went so far as contacting Ackman's clients and telling them to pull their money out of the hedge fund. Incensed, Ackman publicly attacked Moelis around the time of the pricing period for the IPO of his eponymous Moelis & Co., boutique investment bank and has spent the last few months going after him in the press, going so far as to call his firm "not a real investment bank" during last week's presentation.
Ackman's attack on Moelis is not exactly a smart move ahead of his own fund's impending IPO, said one hedge fund manager who requested anonymity.
"If he's worried about his own IPO, attacking the biggest private investment IPO when it happened was not exactly sensible," this manager said. "Moelis has more access to rich people and people who buy IPOs and who price these things than anyone in the country, and it's just nuts to attack him."
A representative for Ken Moelis had no comment on Ackman.
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