Argentina's 'Preposterous' Century Bond Never Got Chance to Grow Old

By Anna Isaac and Pat Minczeski

Argentina's "century bond" didn't last long, but its rise and fall holds lessons for investors at a time of market optimism despite widespread economic dislocation.

An August restructuring guarantees that foreign creditors will get little more than half of what they were due on $65 billion of debt, including the 100-year bonds the government sold three years ago at the height of a decadelong emerging-markets boom.

The century bond -- a rarity in markets and almost unseen among issuers whose bonds are rated junk -- was openly derided by many investors at the time of its sale, given the South American nation's poor record of paying off debt, a struggling economy and fractious politics.

The idea of a serial defaulter issuing bonds lasting into the next century was "preposterous," said Martin Schubert, president and chief executive of Eurinam, a company which trades and advises investors on emerging-markets debt. He stayed away from the bond.

Yet the $2.75 billion in century bonds were quickly snapped up by investors seeking yield at a time of soft growth and low interest rates, and their appeal was intensified by the promise of regular payments for decades. Bullish investors contended a more business-friendly president in Argentina -- Mauricio Macri was elected in 2015 -- would succeed in pushing through an overhaul of the economy and financial system that would benefit purchasers of the country's securities.

"The buzz all revolved around high expectations around the key change in politics," said Richard Briggs, investment manager on the emerging-markets team at GAM International Management, part of Switzerland's GAM Holding AG. "But the fundamentals in Argentina, even throughout Macri's period, were getting worse."

Some investors say the idea of a century bond is worth revisiting because markets in the U.S. and elsewhere are similarly showing signs of exuberance. Tesla Inc. shares have risen to over $2,200 from around $400 at the start of the year. The S&P 500 and Nasdaq Composite Index have surged to record levels this year despite declining corporate profits and a sharp rise in U.S. unemployment.

"Treasury yields are so low, it's forcing investors into risk," said Piotr Matys, emerging-markets strategist at Rabobank Group NV. "That's why people are buying crazy stuff."

Buyers of the century bond included funds run by major firms such as BlackRock Inc., HSBC Holdings PLC, Goldman Sachs Group Inc. and Lazard Ltd., which held the bonds in their portfolios in the months after the sale, according to public filings.

HSBC didn't comment about its funds' ownership of the century bond. But Bryan Carter, head of global emerging-markets debt at HSBC Global Asset Management, said that given low rates globally, there is strong demand from investors with long time horizons to own long-dated bonds. He expects more to come to market to meet that demand.

Some asset managers invested in the bond at least in part because it was included in the JPMorgan Chase & Co.'s indexes of emerging-markets bonds, to which billions of dollars of investment in emerging markets are tied.

To some portfolio managers, the debt was appealing for a combination of reasons. It sported an attractive yield -- the century bond offered 7.85% yield at issue compared with 2.77% at the time on 30-year U.S. Treasurys -- and a maturity that was many years off.

A potential plum for buyers was that purchasing the debt stood in many cases to improve a bond portfolio's risk profile, because of a risk-management measurement known as convexity, a measure of how prices change with shifts in interest rates. In essence, a very long-term bond like a century bond is apt to rise more in price when rates fall and to decline less in price when rates rise than many shorter-term bonds, notwithstanding questions about the health and capacity of the issuer to repay principal.

The decision worked for buyers for a while. For much of early 2018, the return on Argentina's 100-year bond exceeded that on Treasurys of at least 10 years in maturity by double digits, as measured by ICE Data Services indexes. The outlook for Argentina's economy soured throughout 2018, and Mr. Macri lost power in 2019.

It is hard to tell who made the biggest gains or losses on the century bond, because much data aren't publicly available. Autonomy Capital, a hedge fund that bought Argentine debt including the century bond, lost nearly $1 billion before recouping some of those losses more recently, according to a person familiar with the matter.

In the restructuring agreement, the 100-year bond's maturity will shorten substantially, along with its value. Holders will end up with bonds maturing in 15 and 26 years and can expect to recover something broadly in line with the recovery value of the restructuring, on the order of 54.5 cents on the dollar.

That outcome doesn't surprise many who sat out the century-bond sale, reasoning that even in Argentina there were better risk-reward combinations on offer.

"It made splashy headlines," said Kevin Daly, investment manager for emerging-markets debt at Aberdeen Standard Investments Inc. "It was one of these classic instruments that hedge funds and nondedicated emerging-market investors were looking at."

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