Adam Lerrick has promised the retail investors who
sign up for his scheme that he will get them their money
back: that although their coupons might drop and their
maturities might be pushed back, the face value of their
bonds will be preserved.
But there's a problem. As Brad Setser, an expert on sovereign
debt restructuring at the Council on Foreign Relations in New York,
says: "For all his fine words about preserving par value, he didn't
base his compensation structure on preserving par value." Lerrick
gets paid according to the trading value of the bonds that his
investors will end up with, not according to their par value.
Institutional investors who mark to market want to maximize trading
value, while retail investors who hold bonds to maturity are more
interested in par value: that is, they don't discount their future
principal repayment at the kind of interest rates that the markets
do.
There are some good reasons why bonds that preserve par value
might be worth less in trading terms, and why Argentina might want
to avoid repaying investors in full. For one thing, preserving par
value means a higher debt-to-GDP ratio for Argentina, and therefore
makes it more difficult to raise new money. And if the country
issues low-coupon bonds with high final maturities rather than
higher-coupon bonds with lower face value, it could face another
crisis when the new bonds start coming due.
Lerrick is quite keen to avoid complicated Brady-style bond
structures with sinking funds, amortizing structures and the like,
since such instruments are often hard to understand and therefore
trade at a discount.
A limited menu
What's more, Lerrick understands that one of the reasons why
Argentina's euro-denominated bonds have historically traded at a
discount is that they are much less liquid than the dollar bonds.
To help solve that problem, he fully expects Argentina to offer
only a limited menu of new bonds in its exchange offer, meaning
that most bondholders won't be able to get exactly par value in
return: they might get a little bit less, or, indeed, a little bit
more. (Argentina might balk at the latter option, however, for
political reasons.)
So Lerrick is careful not to commit himself to getting investors
all their money back; he will say, however, that "it has been given
to us as a prime objective".
Ultimately, it's not Lerrick who decides which of Argentina's
offers to accept, or even whether to accept any of the offers at
all. Rather, it's the ABRA advisory board, which represents the
bondholders.
The board can decide to accept an offer that preserves par value
and pays Lerrick less money; it can even, if it thinks that Lerrick
is moving away from the capital-preservation theme too much, fire
him and replace him with a different negotiating team entirely.
Since the advisory board gets no part of Lerrick's performance fee,
it has no incentive to maximize the trading value of the new
bonds.
In any case, Argentina is realistically going to have to offer
European investors an option that generally preserves their
principal, if only because a large number of them will not have
signed on with Lerrick's group.
Even if Lerrick and his board are happy with a large haircut in
principal, most independent retail investors won't be, and they,
too, will need to be persuaded to sign on to Argentina's exchange
offer.
The chances are, then, that Europeans will end up with
lower-coupon, longer-maturity bonds, even if the dollar investors
go on a different route.