Jonathan Redwood Capital

Jonathan Kolatch is the Portfolio Manager of  Redwood Capital, a $4 billion credit focused Hedge fund.

1:02: Redwood is very value oriented, and took a look at Amazon, and passed on it. They also looked at Apple Inc (NASDAQ:AAPL) but passed on it.

Then they looked at Argentina, which is the polar opposite of Apple. Argentina has a lot of soybeans, the best soccer player, wine, meet, and more.

Argentina is in a better condition than Europe. Its fiscal situation is close to balanced. Rapid GDP growth and the yield is 15%, which is much better than European countries.

The sovereigns are not trading at such a high premium because it defaulted once, because Brazil also defaulted and has a lower yield.

Argentina’s debt to GDP is 46% but if one excludes intra-government holding it is only 21%.

Argentina’s debt to GDP is 46% but if one excludes intra-government holding it is only 21%.

1:02: As the world grows they might not buy Apple iPhones, but they will buy soybeans.

Even if Argentina defaulted on its debt it would save very little, unlike many other countries.

1:03: The debt is not all denominated in pesos, only about 60% of it, unlike Italy, which is all denominated in euros.

1:05: There was concerned during the crisis about oil revenue.

1:06: In 2010, the President was able to negotiate debt payments from previous default in 2001. They are technically in default, but are not truly at risk of defaulting.

1:08: After the election the president turned more to the left and moved to nationalize YPF. It had more to do with an incredible gas find and less with the country becoming like Venezuela.

1:09: The market hates Argentina because it is scared of a sovereign default.

 

1:10: In 2001, they defaulted because they pegged their currency to the dollar, while all their countries de-pegged, which made the country uncompetitive. The country slipped and end up defaulting.

1:11: They wanted to pay they just couldn’t afford it.

1:12: They have high inflation, even higher than their official rate. They will ultimately have to de-value their currency, but they only hold dollar and European denominated debt.

 

1:13: Argentina is a better place to get a job than Pakistan or Venezuela. There is no civil unrest, it is a democracy.

1:14: They own the Euro denominated bonds over the dollar ones because they were cheaper. They have 15% yield and trade at 0.57 on the dollar.

 

1:16: The bonds are likely worth closer to 102 in a best case scenario. The downside is hard to evaluate but could be 20 or 30%

1:16: another idea is long euro bonds and short dollar bonds, which trade $0.10 a part. No trader has ever been able to explain why this is the case. It should close at maturity soon.

1:17: Some catalysts: Anything that brings in foreign companies. A depreciation of the peso. Settling debts owed to the Paris Club.

1:18: Congressional elections in 2013 and the current president cannot run again in 2015.