Another comeback: the return of the investment funds
Relations with power, privileged information and an avidness for profitable but risky assets; that is how some groups function who want to do business in the country
Sunday, November 17, 2013
By Francisco Juegen
"There is a perception on the market that it’s starting a virtuous cycle. Today was a key day. It has to be pointed out. I believe that the meetings in October at the World Bank it will be critical that you announce before private groups of sophisticated investors your 2010 financial plan. If by then this goes forward you will be at the stage of consummating a swap and going out to the market.”
The e-mail from the important attorney that currently resides on Wall Street come in at 12:37 a.m. on Tuesday, August 4, 2009, at the private email address of Economy Minister Amado Boudou. It had been a celebration day for the financial markets looking at Argentina: the government had complied with its Boden 2015 payment for US$2.251 billion and had invited the banks, after a meeting between Boudou and Jorg Brito, to be part of a group of private actors to audit the INDEC. That congregation never worked out.
"To have the papers takes 3 to 4 months. Once that we’re ready you can decide if a swap is done or not,” added the attorney with close ties to traditional operators from Justicialism and investment banks, important local experience in provincial debt restructurings and in whose firm works Pablo Bossio, brother of the head of ANSeS.
The email is part of one of the annexes of a criminal complaint against Boudou, Diego Bossio (ANSeS) and then-Finance Secretary, now-Economy Minister Hernan Lorenzino, which Deputy Claudio Lozano brought to the judiciary. Weeks ago, the case fell into the hands of Judge Norberto Oyarbide. The proposal from part of the private actors, according to what three sources confirmed to LA NACION, first reached then-Cabinet Chief Sergio Massa.
After his resignation, the issue ended up with his delphin – Amado Boudou. Later on he got the necessary backing from the investment bank Barclays. One year after the e-mail, Citi and Deutsche Bank joined the process, the swap closed, but not for good.
Lozano denounces that this email – added to various others with advice for the minister, settlements of rallies and other indications that suggest the same evolution of the facts – is an example of the “influence trafficking” that public officials abused. For the deputy, they are clear crimes. Bankers, attorneys and officials tell that it is, in turn, the daily lobby of economic power to access millionaire deals through underground ties with politics. And those relations flourish, they say, when operations finally come together, like currently.
As happened in the 90s with the group Exxel, investment funds – represented by bankers with powerful law firms behind them – have gone back to lay their eyes those days on Argentina. With a long-term vision and with a climate – that they project – that is different, the funds Gramercy and Fintech have widened their dealings with the country and have become a mirror like never before for political and economic power.
In this world there are different kinds of investment funds, while the classification is only for purists. There are the most liquid, who buy stocks, bonds and other securities (there you find the common investment funds, the hedge funds, and the offshores) to speculate in the short term; then there are the private equity funds – illiquid—and oriented toward the acquisition of companies and, finally, the distress funds (divided between passive and aggressive) who seek business in corporate and sovereign debt restructurings.
Gramercy and Fintech are among these latter types. Strictly speaking, all the funds do the same thing: they seek money from investors by offering them high yields and then acquire cheap assets to then sell them more expensively.
Gramercy, according to what those close to the fund indicate, currently manages around US$4 billion, of which 60% are assets coming from Latin America. It is one of the funds that entered into the exchange of 2010, after buying millions of dollars in bonds at a low price to then swap them. Its founder and current CEO, Robert Koenigsberger, is an expert in debt crisis in the region.
In mid-2012, Gramercy hired the negotiators – financiers – who promoted the questioned 2010 swap from Barclays. Last year the bank dismantled its offices in the region. That same team had already participated in the first swap of 2005 and maintains close relations with Lorenzino, even since the times of the bond restructurings in the province of Buenos Aires. LA NACION consulted the Economy Ministry, but got no response.
The context in which Gramercy appears is not capricious. Like in that August of 2009, the possibilities are returning to improve the climate with the world. Of course, this time, it’s the crisis of the exchange rate and the flight of dollars that has pushed Cristina Kirchner to the need to issue debt at reasonable rates. To that framework one adds the almost certain defeat by Argentina in U.S. court, a case in which Gramercy is a strong official ally.
Since he took office, Lorenzino has been seeking a solution to this international isolation. He understood that this is the time to play his cards. So the minister sounded out the so-called “Gramercy solution” which, according to sources close to the negotiation, still is not closed nor has the definitive backing of the President, who while she fears a technical default is reticent to negotiate with these kinds of funds.
Today, Argentine debt in default (7% of the creditors) is US$6 billion in principal. If one adds past interest, it comes to US$20 billion. Gramercy’s proposal implies the government issuing similar bonds to those in the 2010 swap, and that those who entered the swap (the 93% of the bondholders) accept a haircut – a part not stipulated in the interest that they will collect in the next five years – which will end up in a trust fund and will serve as a “bonus” for the holdouts.
According to Gramercy, achieving a third swap would improve the performance of all the debt papers. The most attractive part for the government, however, is that the solution is only an agreement among private parties. A virtuous circle with low political cost for the Kirchnerist narrative. In the fund, they estimate that it could manage to move ahead with the agreement of the creditors before the end of the year and, with luck, the execution of the sap for the end of the first quarter of next year.
For the ex-secretaries of Finance, Daniel Marx and Guillermo Nielsen, the proposal has difficult challenges to overcome. “It will need 85% of the total creditors or 75% of the holders of each series to oblige the others to enter by the collective action clause. It will be very difficult to convince those who already accepted a haircut to go back to accepting another,” Marx explains. Nielsen agrees with the issue of critical mass, bu estimates that the main obstacle has to do with the compliance clauses – regulatory rules – which govern investment funds. “After 2008, and the collapse of Lehman Brothers, the regulatory framework is very strong and it paralyzes this initiatives.”
All those consulted by this newspaper agree that the aggressive fund NML Capital, which already sent emissaries to the government, will be easy to convince, since, despite having the backing of U.S. justice, it fears that an Argentine technical default would directly leave it without the chance to collect anything.
The solution has its precedent. Koenigsberger’s fund managed to privatize negative sentences in the ICSID for the government for US$500 million. Gramercy negotiated the final rulings of three companies (Vivendi, Continental Casualty Company and National Grid). Another two firms, Azurix and Blue Ridge, joined, approached by other actors: Merrill Lynch and Deutsche Bank.
"We had to make those companies understand that they were going to collect with a discount, that thy are not going to give you cash, but bonds, and that they have to take their feet off the gas of all the initiatives in which they put obstacles on Argentina,” said someone who participated in the negotiation and who swears that the form of payment was what is known on Wall Street as "two and twenty" (2% for of the total value of the asset plus a management fee by gains of 20%). According to what LA NACION found out, Gramercy already has mandates from various other companies with lawsuits against Argentina in the ICSID, but still don’t have final rulings.
There is another proposal being pushed by the Garrido firm and attorney Eugenio Bruno, for now without official support, which implies the issuing of new bonds with an improvement for the holdouts – in terms that are being defined – and that, at the same time, gives the option that fresh money come in for energy projects.
Friends of power
"In Argentina, he sold himself as being in with Nestor (Kirchner) and Clarin,” says an attorney from Wall Street who asked for anonymity to David Martínez Guzmán, the visible face of Fintech, that – different from Gramercy – is a closed fund (he doesn’t accept external investors). Close to Fintech, they say that the money that he handles is from his family.
The actions of Fintech is in the DNA of its members. “The ex-president of the fund, Julio Herrera, was so hot with this neighbor that he bought the debt on his house and afterwards executed it,” said a banker describing them. In Argentina, the executing arm of Martinez is ex-JP Morgan figure Sebastián Sánchez Sarmiento, his man in Cablevision and ex-director of Autopistas del Sol.
"I am a buyer of undervalued assets,” said Martinez one time before an important official he met in the Middle East. “Today, you’re seeing a country without Moreno, Kicillof or Marco del Point,” said this ex-official to finish with the explanation of the fresh purchase of Telecom, in which the Mexican now has important stock holdings.
Last Thursday, Telecom Italia and Fintech announced that the fund would end up with control of the telecom for US$960 million. “David already was inside Telecom since 2005. He saw the crisis in the Italian firm and as the company had to divest for monopoly issues in Argentina and Brazil, he bought cheaply,” those close to the Mexican tell LA NACION. The Secretary of Communications still has not approved the operation, a seal that could take some six months to be fixed on it.
"Fintech ended up with two-thirds of Sofora, controller of Telecom. The other third is with the Werthein family, with whom David has good relations,” estimates the source. Martinez’s new partners achieved a waiver – they renounced their acquired rights – now that they would have a right of preference to make an offer to Telecom Italia for the local unit. According to what LA NACION found out, Martinez’s idea is to develop Telecom – to add value to it. He plans to present an investment plan that allows bringing 4G to Argentina and improve “the low quality of service.” But for that, they say close to Fintech, there is the need to increase the radio frequency spectrum that the firm has, today near the top allowed by regulations, and for that it would need the state to issue new spectrums.
Low profile but “brilliant and daring in business,” Martinez knows the country. According to the magazine Expansión, through Fintech Advisory, the fund he created in 1987 with a loan from his grandmother, in 1994 he bought Argentine debt for US$834 million. Martinez participated also in the swaps of 2005 – by which he lost money – but also in 2010 – “He bought all the Samurai bonds,” says a banker . According to Marx, between 2004 and 2006 he bought bonds with a nominal value of US$700 million for only US$100 million.
Martínez today is a strong ally of the government in U.S. court and, mainly, against Paul Singer, the number one man at NML Capital, whom he abhors after losing a million dollar lawsuit over a Mexican company.
Born in Monterrey, with a degree in engineering and an MBA from Harvard Business School, in his youth he worked in the department of Emerging Markets at Citibank under the orders of banker Bill Rhodes. “He’s the Costantini of the Big Apple,” said one ex-official about him. The Mexican bought a duplex in 2003 at the Time Warner building for US$42 million, according to the New York Times.
Today, he manages US$4.5 billion as the head of Fintech. In the country, the fund participated in the restructurings of Autopistas del Sol, Cablevisión, Multicanal, Metrogas, Transener, Ciesa and Edenor. In various cases, he took stakes and ended up with part of those companies. According to rumors, the Mexican is thinking of widening his energy dealings in the country.
In 2006, when there was harmony between the government and Clarin, Nestor Kirchner met with Martinez at the Argentine consulate in New York. According to a source who participated in the meeting that was described as “protocol”, the one who arranged the meeting – through the efforts of Planning Minister Julio de Vido – was banker Jorge Brito, owner of Banco Macro. Five days later, Martinez ended up with 40% of Cablevision. After his entry into Telecom, that stake would violate the Media Law.
Even in the days of the famous 7-D splayed out by the government, Martinez saw himself forced to quickly present a draft proposal of compliance for his portion of Cablevision. “He was pressured by Kirchnerism,” say those close to the media group. “For some time, he didn’t come into the country because he was afraid he wouldn’t be able to leave,” said an ex-official who knows him well.
Martínez makes a balance. He needs to be in tune with the government to make the Telecom project move ahead. However, the usual conspirators are out insinuating that the draft compliance plan filed by Martinez is markedly similar to the one Clarin Group then filed. Ironies of fate: Telecom was the ambition that united both Nestor Kirchner and Hector Magnetto.
The country heads backwards
Despite the visibility that Gramercy or Fintech have gained, Argentina is still an unattractive country in Latin America for those investment funds specialized in asset acquisition.
A report from Latin American Private Equity & Venture Capital Association (Lavca) 75 estimates that, between 2008 and 2012, Brazil closed 462 operations of this kind for US$19.851 billion. Behind it appears Mexico (190 operations for US$2.446 billion), Colombia (75 for US$1.697 billion), Chile (80 for US$1.44 billion) and Peru (55 for US$1.049 billion). Only behind this list of countries is Argentina which, for the same period, managed to close 60 deals for US$541 million.
Another report from Lavca affirms that Argentina appears as tenth in the ranking between the countries in the region that are easier in tax and legislative terms for these operations, behind Trinidad & Tobago, Uruguay, Costa Rica or Panama, among others.
The government restarted informal contacts with the Paris Club
Sunday, November 17, 2013
by Christian Riavale
From Paris - Argentina resumed contact in recent days with the Paris Club in an informal manner after various months in which there was no dialogue among their respective representatives.
This “first serious dialogue” since the beginning of 2013 was confirmed by a high official that works on the sixth floor of the Berci Palace, on the shores of the Seine, where the head of the Treasury sits in the French Finance Ministry, the entity which coordinates the activities of that informal club that brings together debtors and creditors at the state level.
In that meeting, no decision was made on the suspended negotiations nor was a schedule agreed upon, but at least “they went back to opening the channels of negotiation” to “continue talking,” said the source.
After so many disappointments, French officials who coordinate the Club – the director of the Treasury, Ramón Fernández and his deputy, Delphine d’Amarzit– made no references for now.
By “simple label of hypothesis,” they estimate that there will be no significant progress until March 2014, but calculate that the conjunction of internal pressures and international constraints will place the Argentine government into needing to seek concrete and rapid solutions with its creditors.
Judge Thomas Griesa on Friday rejected, within the framework of the case Argentina maintains with the vulture funds in New York, two filings from NML referring to a petition for information and on the consideration that Argentina was violating the order not to modify the mechanisms of payment on bonds from the debt swap.
The decision that the U.S. judiciary finally makes on the case worries much of the international community over the difficulty that it could bring to other nations in the future in restructuring their debts.
Paulo Nogueira Batista, representative of Brazil and ten other countries before the IMF, said in his visit in Buenos Aires that on a personal level he “supports Argentina’s position” and said that he finds that while the organizations is not considering it convenient to file as an amicus curiae in favor of the country to take up American legislation, “in the IMF they should produce more reports and debates about the negative consequences of prioritizing the interests of the holdouts.”
Three weeks from when the IMF receives a report about the progress made in normalizing official statistics, Nogueira hopes for a new CPI accepted by the opposition.