NEW YORK: Investing in distressed debt isn't supposed to be a smooth ride. Until earlier this week, US 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 requested anonymity.
A US 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 debt.
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 US District Court Judge Thomas Griesa.
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' original value.
"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.
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