How Argentina beat the bondholder stand-off

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By:
Rob Dwyer
Published on:

As judge Thomas Griesa wrote in his ruling: ‘Put simply, President Macri’s election changed everything.’

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Illustration: Kevin February

As judge Thomas Griesa wrote in his ruling: ‘Put simply, President Macri’s election changed everything.’ And it wasn’t just the New York court system that viewed the new government in Buenos Aires as equating to a political, social and economic revolution. Investors and bankers, both domestic and international, would also be caught up in the furious pace of reform that came in the first few months of 2016 as the Argentine Republic sought a way back to the international markets – access to which was the foundation of the new government’s economic plans. 

The new economic and finance team, headed by finance minister Alfonso Prat-Gay, wasted no time in tackling the fundamental weaknesses and dysfunction of the country’s economy, crippled by over a decade of Kirchners in the Casa Rosada. The over-valued and strictly regulated currency was to be floated, fiscally draining subsidies would be slashed, and the resultant inflation tackled with a refreshingly orthodox mix of monetary and fiscal policies.

But the road back from the international debt wilderness also required change that wasn’t all within the new administration’s powers. Argentina faced a straightjacket of legal rulings in the US and a sceptical judiciary blocking its path back to the international debt markets. Worse, the holdouts sensed an opportunity in the new approach taking hold, so landing a fair deal would prove to be as difficult as it was necessary – for any agreement still needed domestic approval in both political chambers and Macri’s coalition commanded a majority of neither.

That Argentina managed to implement the basic building blocks of its economic renaissance – including a skilful, successful (and legally approved) deal with the funds that were still seen by many Argentines as ‘the vultures’ is testament to the team’s credibility and expertise. It’s an improbable collection of successes. 

Euromoney tells the inside story of those who took Argentina on every step of its journey back to the markets, and in the process became the region’s poster-story for eschewing tired populism and embracing policies that should lead to renewed growth, prosperity and optimism.

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Call it an Argentine stand-off. Luis Caputo, Argentina’s finance secretary, and Pedro Lacoste, vice-minister of economy, turned up with assembled bankers for a showpiece lunchtime presentation during Argentina’s bond deal roadshow

As the team entered the New York Palace Hotel there was a short pause before they descended to the mid-town hotel’s ballroom. The small group needed to confer quickly about the presentation order and to clear their heads after the series of back-to-back investor pitches that had been held all morning. It was then that one of the bankers spotted trouble.

“We may have a problem,” Luis Caputo was told. “Jay Newman is here.”

There was no need to check the guest list to see if one of Elliot Management’s highest-profile employees had been invited by mistake. None of the holdout investors – those companies that had bought up outstanding, unresolved Argentine debt and then had pursued the sovereign mercilessly through the courts for years – was to have been invited. 

The assembled 80-something investors awaiting the lunchtime presentation had been invited to participate in the new Argentine story. It was a good one – both sides knew it – and the improving credit dynamics and still-high yield were in all likelihood going to lead to strong secondary market performance. Buyers would be confident of making money; the only question really was how much. But Argentina was clear: the holdouts were not to be part of this transaction. They had chosen their trade. They weren’t welcome to participate – and profit – from both.

Caputo simply, but clearly, refused to go into the room and make the presentation with Elliot Management in attendance. The obvious remedy, asking Newman to leave quietly, failed. Newman stood his ground: defiantly asserting his right to remain, despite an absence of invitation. Meanwhile, Caputo wasn’t budging either.

Where confrontation had failed, the team now advanced a more oblique strategy. Two smaller rooms were quickly commandeered. Perhaps 20 investors could fit into each, they reasoned. Bankers, good with numbers, quickly divided the assembled group into four groups, with two consecutive presentations run in both rooms.

Quietly and quickly the running order was written: the half of the gathered investors assigned to one of the two first sessions were quietly approached, asked to eat up quickly and head to their new meeting room. Caputo and Lacoste split up to head the meetings, thankful that each had become proficient with the other’s messages during earlier presentations: Caputo fielded deal terms and questions about the holdout negotiations while Lacoste had covered the macroeconomic story, outlook and the country’s economic strategic objectives.

Slowly, the larger hall emptied. People disappeared and didn’t return. The room turned increasingly sparse. There was also no prospect of any presentation about to commence. Newman’s growing suspicions made him investigate. He followed the direction of some other investors and he realised the rules of the game had been changed. 

Resolute, he demanded access to one of the smaller rooms and the presentation that was about to start. But this time he had lost the advantage of physical location. He’d been outflanked, and with no invitation the entrance was barred. Displeased, he remonstrated. His rights, he complained loudly, were being infringed. 

Evidently feeling he was losing the momentum, he spied a photojournalist from the Argentine daily newspaper Clarin, who was covering the meeting. “Take a photo,” Newman thundered. “This is discrimination – Argentina is keeping me away – you should document this.”

The journalist gazed dispassionately back at Newman. “I don’t work for you,” she said eventually. “I’m not taking your picture.”

“It was heroic,” described one of Argentina’s team, smiling proudly at the recollection. 

After so many years of battling with the holdouts, the incident shows that, despite the eventual agreement, it was perhaps only natural that emotions still simmered near the surface. And perhaps, as the holdout chapter was finally moving into financial history, Argentina’s team could be indulged that fleeting victory.

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A lot was going on before that crucial April day in New York: a lot of it in Pedro Lacoste’s head. “We had three recurring nightmares. One was el Cepo [the clamp on foreign exchange – the removal of which Mauricio Macri had made a core pledge during his presidential election campaign],” says Lacoste. 

“Another was the issue of the holdouts – these were the two most important challenges and they were both very important to instilling confidence in the new government – el Cepo domestically and the holdouts internationally. And we needed quick success on these two fronts because of our third nightmare: social riots. We were putting an end to a populist government, ending many social programmes and subsidies. Everybody knew that [their policies] weren’t sustainable, but the crisis hadn’t materialised. We inherited four years of stagnation, but the usual definition of crisis for the man on the street in Argentina is a run on deposits, or a huge devaluation, or inflation of 300%.”

This lack of evident crisis or financial collapse was the core strategic challenge facing the Macri administration that assumed power last December. They didn’t want to provoke a crisis and have to deal with the pain and damage it created. But neither was the level of toxicity of its inheritance widely appreciated. And with a series of unpopular fiscal reforms on the agenda of the country’s new finance minister, Alfonso Prat-Gay, the sequencing and pace of reforms was critical. This was especially true given that the president’s victory at the ballot box had handed him a moral mandate but one that was politically weakened by having a minority of seats in both political chambers.

“We knew too well we were facing political constraints,” says Prat-Gay. “And we have 30% of the population under the poverty line. So one thing was deciding what we have got to do, and what we will do. Another thing, and probably just as important, is determining the sequencing of what we are going to do. We needed gradualism on the fiscal and monetary side – frankly there was no other way. If we had pushed for a swifter approach, we would have soon hit social and political constraints.”

The key to buying the time needed to pursue a slower transition in the Argentine economy was the holdouts. The country had no money, the central bank no reserves (ending el Cepo would be central to addressing that problem) – so Prat-Gay needed foreign capital to finance a multi-year reduction of the public sector deficit.

“The holdout issue was the missing link for our gradual approach to be credible,” Prat-Gay tells Euromoney in his offices at the ministry of finance, the closest building to the president’s Casa Rosada across the road. A blinking bank of trading screens assembled near the central window belies Prat-Gay’s Wall Street lineage (specifically JPMorgan – although Deutsche Bank is well represented in the administration’s finance team through Luis Caputo and Santiago Bausili, the undersecretary of finance). 

An old and fragile travel chess set with thickly moulded figures, bequeathed to Prat-Gay by his grandfather, sits on the table in front of a leather sofa and armchair, providing a nice juxtaposition of technological ages sewn together by the common thread of strategic endeavour and competition.

“I remember one of my first press conferences, when we explained our inflation and fiscal targets,” he says. “The obvious question was: ‘If these guys don’t have access to the market, how on earth are they going to finance that fiscal gradualism?’ We were not very explicit about the financing because we didn’t want the holdouts to realise how important the deal was for us – because a necessary condition for the fiscal gradualism was a deal with the holdouts. Only when you look at it from that point of view do you realise it was very important for us to do a deal as quickly as possible. Any other timing would have been extremely costly for the government – and the country.”

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“We were not very explicit about the financing
because we didn’t want the holdouts to realise
how important the deal was for us – because
a necessary condition for the fiscal
gradualism was a deal with the holdouts”

Alfonso Prat-Gay    

The removal of el Cepo was also to be tackled quickly. It was a campaign promise made by Macri on the advice from his economic team. Prat-Gay describes it as a Macri “trademark”: if elected, the new president was to end the FX restrictions in his first week. 

That claim drew a lot of scepticism from the other presidential hopefuls and economic and financial commentators generally. But in contrast to other areas of policy, where gradualism was the key word, the FX challenge was to be tackled head on. “There is no gradualism,” says Prat-Gay. “You either have capital controls or you don’t. It was quite obvious to us that the sooner the better on that front.”

But it was nearly not so clear-cut. As Cristina Kirchner’s administration entered its final months, its end game became one of pushing economic balances into the next government’s problem. Kirchner had been using a hugely overvalued FX rate to contain inflationary pressures – along with subsidies on energy and transportation to keep those prices below market rates. One of the effects of this was a central bank stripped of reserves – estimated to be at virtually zero on a net basis by the latter part of 2015. 

Rather than deal with any devaluation, the government responded by writing forward contracts with a strike prices of around Ps9 to the dollar – above even the official rate. This delayed the day of reckoning, and a run on the central bank, but meant there would be increased pain for the economy when the day finally came. Prat-Gay petitioned the courts as a private citizen to stop this practice – otherwise, he says, the accumulation of FX liabilities would have potentially meant that “we probably wouldn’t have been able to remove el Cepo as we did”.

But, as promised, end el Cepo they did – on December 17. However, to do so they needed to generate some reserves for the central bank to have as ammunition during the process. And this is where the banks came in, and would stay in, throughout the next four to five months as Argentina stormed back to the international capital markets.

Argentina’s finance team targeted raising between $8 billion and $10 billion to help navigate the FX liberalization. Clearly they needed it quickly. Before Macri was sworn in, Caputo flew to New York. It was to be a busy trip – as well as a secret meeting with the holdouts, he opened negotiations with the investment banks about loans to the central bank. 

Ultimately the Republic’s finance team had to step back and pass the deal over to the central bank: not only is the bank independent, it was very important to be seen as such. The holdouts were watching. Any provable linkage between the repo deal and the sovereign would have been in breach of the injunction put in place by New York judge Thomas Griesa that prevented the republic raising non-Argentina-law dollar financing. 

At least one of the leading banks reported that it received calls from the holdouts threatening legal action against them as they acted in this blurred legal area. The European banks found comfort in US bank participation, reckoning this might give them some legal protection from US courts.


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US judge Thomas Griesa oversaw Argentina’s legal battle with the bondholders.
Although criticised by some in Argentina, he said the new government had
shown “a good faith willingness to negotiate”


In early December the new senior central bank officials were not yet in place and, given the urgency, Caputo opened the discussions. His Wall Street background gave him both the contacts and the ability to cut through the concerns. Many banks were interested in participating, and a repo structure was quickly agreed as the most expedient – it would be the quickest and the collateral component would ensure banks’ internal compliance requirements. Caputo says the banks did try to have liquid bonds put up as collateral for the deal, but he argued successfully that the short tenor meant that liquidity issues were not a necessity.

Once the deal terms were finalised it was opened to the whole street: competition intensified – not least because Caputo had been clear that banks’ financial commitment at this point would be remembered when the Republic came to mandate the positions for its return to the international bond markets – and the terms became tighter. 

Credit Suisse and Goldman Sachs dropped out. Santander increased its size and showed its commitment by lobbying [along with BBVA] its regulator to change capital allocation rules to be able to participate in the deal. Caputo says when he heard the Spanish banks would need new domestic regulations to participate, he feared delays, but the matter was resolved with admirable swiftness.

As the deal progressed, it was pared back to $5 billion. HSBC, JPMorgan and Santander took $1 billion each. They would also, as Caputo had promised, become the global bookrunners on the bond issue that would follow (surprisingly quickly) – with Deutsche Bank the only one on the repo deal with $500 million that made the top tier on account of its “capital markets expertise”.

In the end, the proceeds of the repo, pretty much like all FX reserves, were required only to be known of, rather than to be used. 

More than that, Caputo says the proceeds did not actually arrive in the country until a couple of weeks after el Cepo was lifted, but “the market was well aware of the deal we had made, and that gave the necessary confidence to the market about the central bank’s liquidity position”.

“The central bank never used it,” says Santiago Bausili, who is in charge of public credit. “But they didn’t need it because they had it. If you see the other guy is strong, you don’t pick the fight.” 

Katia Bouazza, head of Latin America global banking financing at HSBC, views the repo transaction as a vital stepping stone to what would become the sovereign’s international debt comeback. “If that hadn’t taken place, there would have been no Argentina story – if there was continued currency volatility we could have seen a lack of investor confidence, resulting in a different scenario,” she says. “It was one of the building blocks for the historic return. Every step was important – including how they negotiated with the holdouts.”

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If Paul Singer, the billionaire hedge fund manager who runs Elliot, made Lacoste lose sleep, the onus of negotiating a way out of the holdouts headlock and back into the international markets fell on Luis Caputo. At a secret meeting at the Waldorf Astoria in New York on December 7, even before Macri had been sworn in, Caputo first met the holdouts and the court’s appointed mediator, Daniel Pollack.

Caputo’s negotiating stance was not made easier by the importance his administration had publicly placed on getting quick access to foreign savings as the means to deliver the space to transition the economy gradually to lower inflation and lower fiscal deficits. The government had tried to hide the importance of re-accessing international capital, but that didn’t ratchet down the pressure Caputo felt about securing a swift agreement.

Expectations weren’t necessarily high outside the administration. Most investors surveyed by JPMorgan thought negotiations would delay the sovereign’s return until the fourth quarter of 2016. Even Caputo’s hopes, despite ambitious initial targets, were not strong after that Waldorf Astoria meeting. 

“After the first meetings, it looked very complicated and it looked like it would take much longer,” says Caputo, who, it quickly becomes clear, has a wry and understated approach to recalling the events of the last eight months. He meets Euromoney in Buenos Aires in August, the week after his first vacation (Portugal) in more than 10 months. Despite looking healthy and refreshed, there are times when he can’t help but reveal in glimpses the weight of those intense months of protracted legal battles in New York. 

Nobody expected resolution in the first quarter, least of all with the favourable terms that Argentina managed to secure. The consensus was of an eventual deal with a haircut of between 15% and 20%. In the end, Caputo says he agreed a haircut of 40% on all the deals he struck – with 25% on the big ones.

Caputo’s success was based on a clear legal strategy and a willingness to take a few risks. It paid off. Although the market was taken aback by the rapidity of the negotiations, Caputo says that, while stuck in the midst of them, at times it felt as if progress was anything but fast. 

The government’s central play was to persuade the courts that it now wanted to settle. It was clear on this. Macri and Prat-Gay announced to the world they wanted to settle with the holdouts, as quickly as possible. The downside to this strategy was that this weakened the holdouts’ incentive to do the same.

“There was no rationale for them to negotiate,” says Caputo. “They had the legal decisions in their favour [the injunction that prevented Argentine raising or paying any debt to investors prevented the country accessing the markets] and the time value of money was also in their favour – they were collecting massive interest on a daily basis. And now additionally they knew that we wanted to pay them – the longer that could take the higher their claim was going.”

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Jay Newman of Elliott Management. On April 12, Luis Caputo was told:
“We may have a problem. Jay Newman is here”

Caputo’s response was to convince the courts, and in particular court-appointed mediator Pollack, that the parties had flipped 180 degrees. 

“My point from the very beginning was that the weapon that the judge had given the holdouts to defend themselves from the Kirchners was now being used to attack us – to kill us,” says Caputo. “My argument to Mr Pollack was that we wanted to settle, but they had no reason to – at least from a rational standpoint. So it was going to be very difficult to negotiate an agreement unless we could somehow get a weakness on their side.”

The first sticking point was Argentina’s desire to negotiate publicly – or as publicly as possible. The holdouts wanted to suppress all details of the negotiation under a legal non-disclosure blanket. Argentina wanted to make its proposal public.

“That was a great idea that came from Mario Quintana [vice-chief of Cabinet],” says Caputo. “And it was extremely important because we wanted to be very transparent with our people and our congress – to be clear that we were the ones who now wanted to close the deal. What would have happened if we hadn’t reached a deal after agreeing to [a non-disclosure agreement that covered all aspects of the negotiations]? No one would have known why, and a lot of people would have assumed it was Argentina’s fault – as it had been for 12 years. So that was the first battle and it was very, very important.”

Caputo says the holdouts resisted this furiously. “They kept saying no. In the end Pollack just said: ‘Enough – these guys want to negotiate, and if it is true that you want to close a deal then let’s just stop this bullshit.’”

This was one of the early signs that Pollack – and through him Griesa – accepted Argentina’s argument that it was the holdouts who were now blocking an agreement. Neither of the parties spoke to the judge directly, but it’s clear he bought the premise. His ruling when lifting the injunction was stark. ‘Put simply, President Macri’s election changed everything,’ he wrote. ‘The Republic has shown a good faith-willingness to negotiate with the holdouts.’

Another factor that appeared to sway the court about Argentina’s readiness to secure an agreement was its offer to pay the holdouts in cash – not in bonds as had previously been offered and was widely expected. Caputo says this played well in the negotiations (“it was extremely positive to the eyes of US justice”), but also had a couple of practical advantages for Argentina. The first was it was cheaper – “the money we saved paying cash was almost more than the haircut” – and avoided an “impossible negotiation”.

“Just imagine how long it would have taken for us [to negotiate] if we had had to agree a price of the bond,” says Caputo. “It would have taken a century. They would have wanted the bonds at a higher rate than the market conditions. And we would have said: ‘If we have an agreement with you those bonds will skyrocket so we actually want you to accept the bonds at a higher price, or lower rate, than where bonds are now’. In turn they would have demanded a premium for liquidity. It would have been us offering 7.5% and them demanding 13%. It would have been impossible to reach a deal.”

There were other, more practical, arguments that Argentina was keenest to settle.

“I spent two and a half months in New York,” says Caputo. “And when I was in Buenos Aires, I was spending about four hours a day on the phone to Mr Pollack – that’s not an exaggeration. Mario Quintana came at least five times too. So clearly if you don’t want to settle, you don’t have your secretary of finance going to New York on a weekly basis. We gave [Pollack] a lot of signs that we wanted to close this issue.” 

Caputo and his team also started picking off the holdouts – first the Europeans, and then a real breakthrough when, in early February, Montreux Partners and Dart Partners – two of the original six US holdouts – agreed settlements. These deals not only proved the desire of Argentina to settle but also the need to be able to access the markets to deliver on these agreements. 

The weight of argument inexorably turned in Argentina’s favour. Griesa lifted the injunction – subject to its ratification by the appeals court that had jurisdiction. This took away the holdouts’ stranglehold and, as Argentina had argued and the courts had accepted, led the remaining larger holdouts to agree terms. 

On February 29 Elliot/NML, Aurelius Capital, Davidson Kempner and Bracebridge Capital agreed a deal that incorporated a 25% haircut on capital and interest, plus a $235 million one-off payment to close disputes outside the Southern District of New York, including legal expenses and the release by the holdouts of all the attachments they had around the world.

The path back was now tantalisingly close. Buoyed by the negotiated agreement and a figure of around $9 billion to settle, the sovereign began to plot its market return. All that was needed now was the appeals court to validate Griesa’s new position and for Argentina to comply with the provisions – one of which was changing the country’s law to pay the bondholders. And that meant steering a bill to pay the so-called vultures through the congress and senate.

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In the end, it took a 20 hour-debate before Argentina’s congress voted in favour of the bill that enabled the Macri administration to pay the holdouts. Early on March 16, after an all-night session, deputies voted by 165 votes to 86 to turn the page on the debt issue that had ended up defining the previous administration. The vultures were to be paid – in cash. The senate would later ratify the bill in the early hours of March 31 – this time with nearly three-quarters of senators voting in favour.

The overwhelming support for the bill was remarkable given the issue’s political legacy: to say that paying the holdout funds was a sensitive issue is akin to saying that the Lehman Brothers’ bankruptcy caused a disruption in the markets. It had become the defining issue of Cristina Kirchner’s presidency. Negotiations had stalled, soured and become ugly. The holdouts had seized an Argentine naval vessel in a foreign port – an enraged Kirchner had railed against vulture funds and sworn never to besmirch the country’s honour by surrendering to their demands.

Now, barely months into Macri’s administration, Prat-Gay’s team was proposing to hand over around $9 billion in cash to these same funds. To do so they had passed a law in congress and senate, despite only having a minority of seats in both chambers.

Prat-Gay led the debates personally. Ultimately, he noted, the agreement got more votes in favour from Kirchner’s Front for Victory [FPV] party than from Macri’s Cambiemos [We can change] coalition – in nominal terms. Congress passed the bill with a nearly two-thirds majority; in the Senate it was almost three-quarters in favour.

Caputo says there was always optimism, despite cynicism about the weak political position of Macri’s minority government. For two reasons. First, he says: “We knew that it was a very good deal and it was hard to argue against that – it was essentially the same deal in value terms as the 2005 exchange.” And second, the provinces needed access to the capital markets, and this deal offered them that at much lower rates – which is why many of the old Kirchner allies voted with the government.

Bausili adds another reason: “We put the onus on congress. We had done all we could and now this passes to them. Congress is the representative chamber of the people – you are the debtors – tell us how to move forward.”

Bausili also thinks it was an opportunity for lawmakers to show they were adapting to the political shift in the country that Macri’s election represented. “They had been elected in October 2015 and then a week later the country’s mind-set was seen to have changed,” he says. “This vote was a chance for them to show they can align with this new political reality, and they took that opportunity.”

The process included a convincing victory for Prat-Gay against Axel Kicilioff, Kirchner’s economy minister (YouTube has several posts of the exchange, some viewed hundreds of thousands of times, and even for a non-Spanish speaker it’s quite clear who wins the argument, even if there weren’t descriptions in the posts underneath of Prat-Gay ‘destrozó’ or ‘humilió’ Kicilioff). It also proved valuable in the roadshow to come. Because, while investors did not question the new economic team’s competence, they did wonder about the administration’s political power, and the thumping majorities for the bill played very strongly to this issue of governability.

“This was proof for the foreigners and investors who worried that, beyond our intentions, politics was going to make it very difficult for Macri to pass laws in Congress,” says Caputo. “This proved the opposite, and was something the market took very well.”

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With an agreement in place with the holdouts – albeit with tight deadlines for payment (stipulated for Wednesday, April 13 – coincidentally the day the appeals court ruled) and unfettered by domestic restrictions to tap the markets, Argentina launched its marketing offensive. 

The roadshow, split into two teams (one blue, one white: the national colours), began meetings on April 11. No specific date had been given for the decision, nor was there any great certainty about its outcome. But they pressed ahead.

Bausili explains the team’s strategy. “We thought if the decision is good for us, we will be ready to price the deal [by launching the roadshow ahead of that decision], and with the court in our favour the holdouts won’t walk away unless they think we can’t raise the funds,” he says. “So in this scenario we should start the roadshow and they will know if it is going well. But if the court decision is against us then we have no control anyway – we wouldn’t be able to meet the payment date in the agreement with the holdouts – and they would walk away anyway. But let’s work on the probabilities of getting the deal done as close to the ruling as possible – and so let’s just go for it.”

Bausili started his roadshow in London. The tricky part was the presentation. The historic data wasn’t credible – Argentina’s statistics agency had been so politicized that no one believed what it published. It wasn’t relevant either – this was a story about regime change – or a new start. But the lawyers were restrictive about forward-looking statements.

The presentation and script Bausili received from the banks was, diplomatically speaking, “very, very bad”. Bausili imagined a 25-year-old associate tasked with producing the roadshow materials. He or she would have had no experience of the last Argentine bond market 15 years earlier – no idea of the role Argentina used to play in Latin American fixed income – or in emerging market fixed income.

Poor as it was for the banks to send Bausili such mundane material, the crux of the sale was the team that sat in front of the investors and what expectations could be created for the future, which had no place in the written material. Who was telling the story was more important that what the story was.

“In paper form, the pitch was probably very shallow,” says Bausili. “So yes, the presentation was quite vague because, very different from a traditional transaction, the decision to participate was driven by how much you feel you can depend on the team.”

Caputo says the opening meetings went well, albeit underlined by a sense of caution. Supply overhang was the key concern – investors didn’t want to have their deal damaged in the secondary market by another wave of Argentine sovereign debt following shortly after this one closed. 

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“Investors wanted this to be
as much of a one-shot deal 
as possible"

Robert Silverschotz, 
Santander

“Given the size of the financing needs that we had, I knew this was going to be a concern for investors,” says Caputo. “So we let them know that this was going to be the only time we are in the market this year. It opened the doors to maximize their input.”

Robert Silverschotz, head of fixed income syndicate at Santander in New York, says: “Investors wanted this to be as much of a one-shot deal as possible and not one of many Argentina deals this year. This was to be their opportunity to get scale and reload without significant new-issue supply overhang.”

That the sovereign came later this year with another deal upset some investors, according to one banker who participated in the April deal. “It pissed a lot of investors off – they said it was going to be a liability management deal and, on the face of it, it doesn’t look like it.”

However, one banker involved in the new deal says: “Semantics. They said they wouldn’t raise more funds – this is a liability management exercise. Money is fungible. So far the money hasn’t been used but they say it will be in December.”

For Bausili, the issue was a lesson that “there is always going to be someone who complains – and it’s much easier to hear complaints than praise”. 

He says Argentina notes the feedback but says it is committed to using the funds for a liability management exercise and retiring outstanding warrants in December. 

Also, he says: “Our bonds were rallying like crazy and we were getting reverse enquiries. We had already said we were going to do a trade for the warrants. The deal was very well subscribed and the secondary market [for the April bonds] didn’t move one cent. That’s the really amazing thing about that deal – you always see the secondary market curve suffering when you announce another deal – especially when the size could be relevant – but we placed $3 billion and there was zero movement.”

Bausili, a DCM veteran of nearly 20 years (at JPMorgan and Deutsche Bank), says the deal was like nothing he had seen before. The concept of a roadshow had become a misnomer. For the first time in his experience of sovereign deals, the investors came to the issuer. That had the advantage of enabling more investors to meet the sovereign’s teams but made it a tougher challenge for the presenters – with no down time between meetings to clear their heads. 

“We had investors knocking on the door of our hotel wanting to come in before the other meeting had wrapped up,” says Bausili. “It was crazy.”

And there was a paradox: bankers say the team created such high credibility and trust that many of the messages coming back from investors were that this was an obvious trade and they wanted to be part of it.

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One of the bookrunners remembers a call he had with a very large West Coast investor: “He told me you don’t need to roadshow this deal. He said: ‘They don’t need to see us – we know these guys and we know what they are about’”. 

Another bookrunner describes it as less of a roadshow and “more of an opportunity to connect with old friends and talk about objectives”. Another says it felt like “a victory lap before we had even started the roadshow” because “these guys had so much credibility and they were able to tell a very credible story”.

Before the roadshow even kicked off, $10 billion of orders had been received. Yet the demand for meetings was huge – people wanted to see and be part of what was clearly becoming something historic.

“The syndicate desk told me it was like the Anheuser-Busch InBev deal,” says Bausili – referring to the January transaction that raised $46 billion with a $100 billion book. His own deal would raise a book of nearly $70 billion for just $16.5 billion – a record for Latin America, emerging markets and high yield.

By the time Bausili reached New York, the dynamics had changed. Even before the appeals court cleared the issue to proceed, the tone had subtly changed. The power was definitely with the issuer.

“I remember our first meeting in New York on Wednesday – the 08:30 meeting,” recalls Bausili, who had taken over the meetings for the day. “The investor said she knew that there was a lot of concern about a potential issue of $15 billion being too big. Her concern was the opposite – she wanted to know how she could ensure that she could secure enough allocation. And it showed how well she understood her asset base – she was absolutely right.”

Bausili adds that when the appeals court ruling came out later that day it led to “a blow-out”.

It also plays to another point that the bankers and the issuing team bring up: despite the near $70 billion in orders, there was little inflation in the book. The issuer targeted the investors it wanted, the strong names in the buy-and-hold universe, and had a candid conversation about submitting exactly what they wanted. This probably led to inflation in certain other investor segments but it wasn’t a widespread phenomenon and speaks to the quality of the book.

“The deal was well anchored by the largest emerging market and high-yield investors globally, who had great familiarity with and confidence in Argentina’s finance team,” says Silverschotz. “Aside from the fundamentals, the trust factor was enormous.”

On the Thursday part of the roadshow moved to the US west coast. Lacoste remembers his excitement at reaching California and finally being on a real roadshow. “We were in a van, driving between downtown and Newport Beach,” he says. “Finally we were in a roadshow!”

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If the appeal of the deal was strong – albeit strongly skewed to confidence in the team behind Argentina’s regime change – it was further boosted by the external environment. The deal was lucky with its window: risk appetite was on and yields on offer looked juicier still in the low, or even negative, interest rate environment found in developed market credits.

The relative value to other EM credits helped investors feel good about Argentina. Brazil was going through a deep political and economic crisis. At that time a path out was much less clear than it would appear today. 

That relative value was seized upon. “I was comparing us to other credits, and at that time Brazil was in a very tough situation,” says Caputo. “I was explaining to investors: ‘Look you can buy Brazil at between 5% and 5.5% and you have no idea where the country is going. Nobody knows. At least with Argentina you know you are going to do better. We can discuss how much better, but you know you are going to be able to make money.’”

For investors, that almost sure-fire moneymaking opportunity contrasted hugely with the rest of the world. Where else could they get the credit momentum? Where else could they buy into an early recovery of a country with sound medium-term fundamentals that was going to have to pay up due to short-term difficulties that a credible economic team was addressing?

So demand flowed and the book grew – finally almost touching $70 billion. A reverse enquiry had led to the three-year tranche “which was a trade that we hadn’t anticipated because we had thought the five- and the 10-year would have been the natural instruments,” says Bausili.

One banker adds: “We hadn’t realized how good a carry trade it was, given the context of what was going on in the rest of the region. But for investors, suddenly there was a three-year bond in the area of 6% – you needed to get to the 10-year or 20-year Peruvian curve to get something comparable in terms of yield and carry and this had no duration risk.”

From the issuers’ point of view it also lowered the average cost, but they kept it small to avoid skewing the average duration and creating too large a refinancing risk in the near term. They also limited the 30-year tranche – bankers said they had to convince the issuer to tap this demand – because they were confident in their improving credit profile. “We had faith that the spreads would narrow significantly, and we still believe so,” says Caputo.

“They didn’t really want to pay up for the 30-year,” says one of the bookrunners who declined to be named. “On the other hand, they wanted to raise $16 billion and if you don’t have a 30-year you need a larger five or 10 or put in a seven. In the end, we started discussing the 30-year at around 9%, and then it priced at 8%, and they kept it to a minimal size and they ended up feeling comfortable about that tranche.”

Technical demand also helped – with the size attracting investors who needed to participate to keep in line with key benchmark targets. The inclusion in the Embi index helped in that regard, but Silverschotz is clear what drove the deal. “This technical factor helped but wasn’t the overall driver of success,” he says. “Investors saw this deal as a great entry point to participate in one of the strongest recovery stories globally, at a reasonable yield pickup versus regional peers.”

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With no perfect benchmarks there was a lot of price discovery – and a lot of subjective, relative assessment involved in pricing what was often referred to as the country’s re-IPO.

Pricing is always as much an art as a science, and the bookrunners came to the Republic’s team with the standard strategy, of opening initial price thoughts around yield expectations from the large investors. Beginning with the 10-year benchmark, the banks suggested between 8.25% and 8.5%.

However, Caputo is a trader by background. He knew the banks’ argument: start out higher and then tighten. Being too aggressive risks losing large accounts at the outset. If word gets out that some key accounts have passed, the others sense problems and the momentum is lost. To sell a bond, particularly $12 billion-plus of bonds, you couldn’t risk a shaky start to building the book. 

Caputo remained cool. “I know the messages that issuers have to give to investors,” he told the bankers. “But what about the messages the investors are giving us?”

Caputo was looking at the price for outstanding bonds in the market – such as the Bonar 24s – that had skyrocketed during the week of the roadshow. “That told us that investors were worried that they wouldn’t get sufficient allocation,” he says.

The discussion wasn’t easy, but eventually the banks drifted to the Republic’s viewpoint, and the 10- year bond’s IPT was in the 8.00% area, with the three-year at about 6.75%, the five-year around 7.50% and the 30-year close to 8.85%.

Caputo was proven right: on the back of the strong demand, the bookrunners were still able to tighten the price.

“From initial price thoughts to price guidance to final pricing, the syndicates were able to tighten pricing 85 basis points on the 30-year, 50bp on the 10-year, 62.5bp on the five-year and 50bp on the three-year,” says one of the global coordinators. “The reduction in spread was a function of demand that exceeded all of our expectations. This was a record-setting book.”

And still the bonds rallied – and rallied hard. Some commentators suggested the savvy Argentine team deliberately left money on the table to enable the provinces and corporates to follow. This was clearly a ‘table-setter’ in that the $20 billion of sovereign bonds were been topped up by $6 billion of provincial debt and $5 billion of corporate.

HSBC’s Bouazza says the positive impact went further still. “The deal helped the smaller provinces have access to the market and it also gave confidence to issuers elsewhere to jump into Latin America as investors had more appetite for the region,” she says.

But suggestions the price wasn’t set aggressively are widely dismissed.

“Luis and Santiago are very sophisticated guys and they know the importance of bringing a deal that performs well in the secondary,” says one of the global coordinators. “But the bottom line is we didn’t price at a level that we thought would rally significantly, we brought it at a fair level which we thought was consistent with demand.” 

The rally, the bankers say, was a natural function of having $70 billion in orders for a $16.5 billion deal – there would of course be a strong post-launch bid for this paper. Yes, the 10-years have rallied by about 100bp they say – but so too have Brazil’s.

Bausili knew the bonds would perform well in the secondary market. It’s all part of the improving credit story the team is achieving. “The 30-year tranche – the one they were initially loath to issue – is trading around nine points up,” says Bausili, looking at his trading screen. “Mind you, after the results of the tax amnesty and progress on the fiscal reform that’s to come later this year, I wouldn’t be surprised if it’s 17 points up by January.”