* Distressed debt specialist pursuing payoff for nearly
* Elliott founder Singer scours bonds gone bad for pennies
* Argentina running out of legal room, negotiations seen
By Daniel Bases
NEW YORK, Dec 2 Investing in distressed debt
isn't supposed to be a smooth ride.
Until earlier this week, U.S. hedge fund Elliott Management
had seemed close to victory in its near decade-long legal battle
with Argentina over the country's defaulted debt.
Then, the latest courtroom twist on Wednesday pushed the
case into 2013, giving Argentina precious breathing space to
rethink its strategy.
Elliott - founded by publicity-shy billionaire Paul Singer -
remains confident its strategy of blocking Argentina's every
escape route with lawsuit after lawsuit will pay off.
"The momentum slowed but it doesn't change the court's
ruling in Elliott's favor," said a source close to the fund who
A U.S. appeals court on Wednesday issued an emergency stay
order blocking, at least through February, a lower court's
previous order that Buenos Aires make a $1.33 billion payment by
Dec. 15 to so-called holdout investors such as Elliott.
The fund is owed roughly $665 million, or half of the
court-ordered payment due to a wider group of holdout investors.
They refused to accept losses on bonds imposed by the South
American country in debt restructurings after its historic $100
billion default in 2002. They have been fighting to be paid in
full ever since.
Elliott is believed to have bought most of its Argentine
bonds at steep discounts after the default.
The returns could be spectacular, even considering the hefty
legal fees Elliott has racked up.
"Elliott could make 10 times their original investment,"
said Russ Dallen, head of Caracas Capital Markets, a
Venezuelan-based investment bank that trades Latin American
He based his estimate on an assumption that Elliott bought
the highest-yielding Argentine bonds for a quarter of their face
value - levels where they traded in the years after the default
- and manages to get paid not only for the bond's original full
value but accrued interest too.
Elliott's analysts typically scour the small print of bonds
sold by countries and companies that fall into financial trouble
for any loopholes that could bring them returns. They see profit
where others see risks that are too high to stomach.
There is precedent for paying holdouts even after a
restructuring is sealed. Most recently, Greece paid 435 million
euros to holdout investors after it restructured its debt.
Singer's fund could be eyeing an even bigger windfall.
It holds an additional $1.6 billion bonds covered by other
favorable judgments handed down by U.S. District Court Judge
If it wants to settle all its claims in one go, the fund
will have to get Argentina to the negotiating table first.
Elliott would consider accepting a combination of cash and
bonds to settle the dispute, said another source familiar with
the case, adding: "That's how these things usually work."
There is another potential way for funds like Elliott to
cash in on the Argentina stand-off: building up a big position
in credit default swaps that would pay out if the country were
unable to keep up payments on its restructured debt.
Argentina has accused Elliott of trying to engineer a
default to profit from CDS. But one of the sources familiar with
the case said Elliott no longer holds a position in Argentine
CDS, let alone one big enough to make up for its investments.
Even with billions in legal judgments in its favor since
embarking on a global pursuit for Argentine assets, Elliott has
managed to collect just a tiny fraction of its claims. In one of
the more bizarre twists in this legal battle, Elliott recently
persuaded Ghana to detain an Argentine naval training vessel in
an effort to extract cash from Buenos Aires.
LITTLE CHANCE OF PEACE TALKS
The chance of negotiations any time soon look slim.
The government has hinted it might be willing to reopen the
2010 debt exchange. But the holdout investors are not likely to
take something they've rejected twice already, especially when
legal victories have brought them closer to a payout.
Furthermore, opposition in Argentina to doing a deal with
the funds is intense, both within the government, among the
public and among some other investors who settled for deals in
2005 and 2010 that gave them only about 30 percent of the bonds'
"Even the taxi drivers know who Elliott is and curse them,"
said one New York investor who participated in the debt
exchanges in 2005 and 2010.
He, like many in Argentina, said Elliott was holding the
nation of 40 million hostage because threats of legal action
prohibited it from selling debt in international markets.
Another big hurdle to negotiation is Argentina's "lock law",
passed in 2005, that blocks any payment to holdout investors.
A decade of seemingly endless lawsuits, opinions, orders and
appeals, has exasperated Griesa, the longest serving judge on
the Southern District of New York bench.
"When is this ever going to end?," he exclaimed in court.
Elliott's first lawsuit against Argentina was filed in 2004.
The kind of criticism leveled at Elliott from Argentina is
nothing new to Singer, a conservative-leaning Harvard-trained
lawyer, who founded the firm in 1977 and built it into a $20.7
billion company. It calls itself a multi-strategy investor
but distressed debt investing has brought most of its notoriety.
Argentina has branded Elliott and like-minded hedge funds as
"vultures" for seeking to profit from its economic calamity.
Elliott's operations, run by the fund's staff of less than
300 people, are not exclusive to sovereigns. It has been a major
player in the Lehman Brothers and Delphi Automotive
bankruptcies. On Thursday, it scored a major victory blocking
Mexican glass maker Vitro SAB de CV's restructuring plan.
Singer's lawyers argue the firm stands up for investor
rights and its deep pockets, lined by a net compound annual
investment return of 14 percent since 1977, mean it can afford
the huge legal bills to push its position to the max.
One of the sources familiar with the case said the fund's
legal bills, while high, are less than the $20 million that
Argentine media say the government has paid to its lawyers at
the gold-plated legal team from Cleary Gottlieb Steen &
Hamilton, the dominant player in sovereign debt restructurings.
"They play a particularly aggressive game and I don't fault
them for that. They are distressed debt investors who face the
uncertainties of their decisions," said a senior sovereign debt
lawyer who asked not to be named due to the sensitive nature of