After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
What does a French actress, Chinese burns and Argentinian steak all have in common?
As the old saying goes, ‘Buyer Beware’ – and it is used a lot in secondhand car dealerships.
It’s also common in the distressed bond market.
It means that you should know what you are getting yourself into, so always check underneath for “oil leaks”; in this case, what asset backing your distressed bonds may have.
One activist hedge fund once took on the Argentinian government over defaulting on their sovereign debt.
As we all know, government bonds (or gilts, as they are called in the UK) are perceived to be instruments which are 100% safe and can be relied upon to pay a coupon and then deliver a redemption cheque on maturity.
They are the instruments of choice for insurance companies to park their premium income in before those funds are required to pay out any claims (if any at all).
However in the land of beef cattle, leather-cracked tanned cowboy faces and the odd polo field, they tend to default on their government backed debt a few too many times.
‘Don’t Cry For Me Argentina’ becomes their new national anthem for a couple of weeks ahead of the government defaulting and re-arranging their debt.
Their last one was a cool U$80bn default!
A fistful of dollars
They used to get away with it until a hedge fund called Elliott Management came along and took them on.
They and a few other hedge funds went large into Argentinian government bonds and demanded full payment on the bonds’ face value.
Put it this way, Elliott Management ended up turning bonds which they purchased as distressed debt for U$117m into $2.4bn.
Now that sounds like an easy way to make a lazy couple of billion but it took 15 years of Elliott Management persistently taking Argentina to court, that won them their reward at the end of the day.
Pretty much the same story goes for Bell Resources bond holders, who eventually got their bonds repaid at their face value, even though they paid as little as 3c in the $1.00 for them.
Mind you, it took 30 years of fighting before Bell Resources bond holders got their maturity payments and cost $328m in lawyer fees, etc.
These bond holders took on the WA government, not the country of Argentina. Elliott’s tactics required much larger “cojones” to pull their win off.
As an activist hedge fund, they were happy to fight dirty to get what they wanted and their tactics infuriated the Argentine government so much, it took out full page adverts in the Washington Post denouncing Elliott as ‘vultures’ and ‘financial terrorists’.
Imagine the board of directors of BHP when Elliott Management appeared on their register with a 5% shareholding in 2017 and demanded a few changes!
They all turned white and pulled up the drawbridge for two years, before things thawed and BHP eventually realised that their activist demands made sense.
After four years of them arriving, they basically got what they originally demanded and no full page adverts were required.
Ow… that stings!
However, things are different in the Middle Kingdom.
If the Chinese government wants a financial result to go its way, that is what will happen.
This is an important point missed by a few Elliott wannabe hedge funds that decided to take on some of the bonds issued by Evergrande.
Evergrande is the largest ever Chinese defaulter of debt, having issued US$19bn of offshore bonds and then defaulting on them.
These bonds were backed by US$242bn worth of assets, so can you imagine the profits that you could potentially make out of this trade.
Junior hedge fund managers would be sleepless and sweaty with excitment about bonus cheque day; experienced funds would quietly enjoy a cup of cocoa and a good night’s sleep.
Having built up their positions in Evergrande bonds, the juniors started to swagger around the courtrooms in Elliott Management style and quote global precedence as to why they should get full face value on their bonds.
On January 19th 2024, when the courts ruled on the biggest winding up order in Chinese history, it included that bond holders will be entitled to only 1c in the $1.00.
Now, everyone in the room knew how the Chinese government exerts influence over corporate affairs in ways that are uncommon across the developed world. But everyone had underestimated just how much it would intervene for the sake of political and economic expediency.
The Chinese government had sent out a message to the rest of the world – if it decides you will get 1c in the dollar, then that is what you will get.
Interestingly, I couldn’t find any mention of Elliott Management’s name in any articles mentioning Chinese bonds, however I did find out that Bridgette Bardot gets a mention in an official court paper regarding Bell Resources bonds.
If you have the time and inclination on finding out how a French actress (affectionately known as B.B.), appears in an official court paper which also includes the names of Alan Bond and Robert Holmes a Court, then here is the link.
And if you know of any junior hedge fund managers, who now can’t sleep because they have f….d up their very first bond trade, then you may want to pass on that link.
That way they will at least be able to see what a real “restless” night feels like.
Au revoir!
The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at thesecretbroker@stockhead.com.au.
Feel free to contact him with your best stock tips and ideas.