James Dondero Sees Argentina Debt Deal in 1Q, Dollar Bonds to Soar

Argentina is likely to conclude a deal to pay so-called holdout bondholders at some time in the first quarter of 2015, according to James Dondero, President and co-founder of Highland Capital Management, which together with its affiliates advises approximately $20 billion.

Dondero said that deal will cause a huge rally in Argentine bond prices and other Argentina assets.

“We think [yields on the country’s dollar bonds due 2033 would fall] to 6% at a minimum, just based on where other weak and controversial sovereigns trade,” Dondero said. That implies a price rally to $1.25 from current levels around 91 cents on the dollar, Dondero said. “Once you get there, you could make a real argument that it grinds down to 5% and $1.35.” Bond prices rise as yields fall.

Dondero, whose Highland Global Allocation fund holds some $270 million in Argentine debt, said such numbers are easy to justify given countries like El Salvador, Paraguay and Iraq have bonds that trade around 6%.

President Cristina Fernandez de Kirchner has run out of options in her decade-long battle with bondholders led by Paul Singer’s Elliott Management hedge fund. Elliott won a ruling — upheld by the U.S. Supreme Court –that Argentina must pay bondholders the full face value of dollar-denominated bonds. Fernandez has refused, branding Elliott and others “vultures.”

According to Dondero, she has argued the law and lost, spun the facts and lost, tried to discredit her opponents and lost, and now she is crying on national TV and embarrassing her country. “She has no more cards to play,” he said

The crisis has caused capital flight and a steady erosion in the value of the Argentine currency, the peso. The official exchange rate is 8.5 pesos to the dollar while the unofficial rate is closer to 13. Dondero said the peso could go to 20 or worse if soybean prices remain 40% below summer highs and if farmers continue to hoard production in protest.
“She is playing chicken with a currency crisis from a weak reserve position,” Dondero said. She risks toppling the government and the well-being of her people.”

Dondero said there is a general understanding that Fernandez will have to cut a deal with Singer and the other holdouts as soon as RUFO limitations expire at the end of December.

Public opinion polls and surveys of politicians suggest overwhelming support for such a compromise.

First, however, she will demand to reach a political accommodation with the ruling Peronist party for “safe passage” for herself and her son Maximo – essentially a guarantee that they will not be prosecuted for corruption and wealth accumulated while in office, Dondero said.

The Fernandez administration has been beset by persistent allegations and she and her late husband, former President Nestor Kirchner, amassed a huge fortune, well over $1 billion, while in office.

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