Learning from Argentina's downfall continues.
Dear International Friend,
Yesterday we began looking at why Argentina has run into an economic quagmire, what we can learn from this as investors and what opportunities we might gain from this now.
Such defaults offer opportunity if one can choose debt that is likely to be paid, such as the par bonds described by Steve Rosberg our eClub advisor in Buenos Aires when he wrote:.
HERE ARE SOME IDEAS On ARGENTINE BONDS. MORE INTERESTING OPPORTUNITIES MAY ARISE AS THE NEW GOVERNMENT'S INTENTIONS AND PROSPECTS ARE CLEARER.
NOTICE HAS BEEN SERVED THAT ARGENTINE DEBT PRINCIPAL AND INTEREST WILL NOT BE PAID UNTIL A RESCHEDULING HAS BEEN AGREED UPON. I BELIEVE THAT THIS WILL TAKE THE SHAPE OF EXTENDED GRACE PERIODS, LOWER INTEREST RATES. AND PROBABLY LITTLE REDUCTION OF DEBT.
YOU ARE RIGHT THOUGH THAT PRESENT PRICES ALREADY CONTAIN GREAT REDUCTIONS IN VALUE SO OFFER POTENTIAL FOR HIGH RETURNS..
ONE BOND THAT IS PARTICULARLY INTERESTING BECAUSE OF ITS CONTAINED RISK IS THE PAR BOND. IT WAS ISSUED UNDER THE BRADY RESCHEDULING. PRINCIPAL IS GUARANTEED BY A US TREASURY ZERO COUPON (WHICH ARGENTINA BOUGHT AT THE TIME OF ISSUE, AND DEPOSITED WITH A US BANK). THIS ZERO COUPON BOND GUARANTEES THAT THE FULL VALUE WILL BE PAID IN 2023.
THE LATEST PRICE ON THE BOND IS ABOUT 46 CENTS ON THE DOLLAR. THIS MEANS YOU CAN BUY A BOND THAT IS GUARANTEED TO RETURN 1,0000 IN 2023. PLUS THE BOND ALSO PAYS 6 PER CENT (ON 100, NOT ON 46). TH HIS MEANS EVERY $460 INVESTED RECEIVES $60 A YEAR OR ABOUT 13% PER ANNUM. ADDED UP THIS MEANS THAT EACH $460 INVESTED WOULD EARN A TOTAL RETURN OVER THE NEXT 21 YEARS OF $1,860 ($60 A YEAR PLUS $10000 AT REDEMPTION) IF ALL IS PAID.
HERE IS THE APPARENT RISK. THE VALUE OF THE ZERO COUPON GUARANTY IS ABOUT 36 CENTS ON THE DOLLAR. PLUS ALSO GUARANTEED ARE THE TWO COMING INTEREST PAYMENTS (AS THE ARGENTINE GOVERNMENT DEPOSITS THESE IN ADVANCE), WHICH MEANS A TOTAL OF 42 CENTS ON THE DOLLAR ARE NOT AT RISK.
THIS MEANS IF ONE INVESTS AT 46 CENTS ON THE DOLLAR AND EVERYTHING GOES WRONG, THE ACTUAL RISK IS TO FOUR CENTS ON THE DOLLAR.
NOTE THE FOLLOWING PARTICULARS OF THE ARGENTINE PAR BONDS:ISSUED ON MARCH 31, 1993, MATURITY MARCH 31, 2023
SEMIANNUAL INTEREST PAYMENTS
INTEREST RATE: YEAR 1 - 4% YEAR 2 - 4.25% YEAR 3 - 5% YEAR 4 - 5.25% YEAR 5 - 5.5% YEAR 6 - 5.75% THEREAFTER: 6% (*)"
In all this looks like a pretty good deal, but there are some other risks (and rewards as well which we will review in the next message. Until then, good global investing!