Thursday, 20 September 2018

Power of the prospectus

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Peters is sympathetic to Argentina’s legal plight.

There is a strong sense that the dog days of August have started well ahead of time and that volumes are low and sporadic as everyone appears to be either just about to leave for holiday, is already on holiday or has only just got back from holiday. Others would blame the very uncertain macro-economic and geo-political environment for the lack of firm commitment on the part of the investing community.

Be what it will, yesterday I enjoyed a lovely day at the horse racing at the Glorious Goodwood meeting in West Sussex – without a doubt the world’s most beautiful racecourse – and can only confirm that the crowds were unusually large for the first day of the event. I wonder how many of them were other City folk who had skived off for lack of anything more meaningful to do…

That is, as long as one is not meaningfully exposed to Argentina which might or might not default technically before the end of the week. I am the generation which well remembers the Falklands War and which is therefore particularly suspicious of Argentinian leaders and their ability to pull their country and its people into the abyss for the most spurious of reasons. I make no secret of my dislike for President Cristina Fernandez de Kirchner and for her neo-Peronist populism, but I do, to some extent, have sympathy for the Argies in the case of the hold-out creditors.

The case against Buenos Aires hinges, unless I am mistaken, on the interpretation of some of the negative pledge provisions. Those who have dealt with lawyers know the difference between what the client wants his lawyer to say, what the lawyer actually wants to say, what the lawyer actually says, what the other side’s lawyer hears, what the other side’s lawyer tells his client he has heard and what the other side’s client understands his lawyer to have said.

When I came into this business, a bond prospectus was a short document of 20 or 30 pages – in the euro-deutschmark market it could be as short as 5 pages – in which it was agreed who had borrowed and how and when it was to be repaid. Pretty simple stuff. These documents are now measured not in pages but in kilogrammes. The more that is written, the more that can cause disagreement in terms of interpretation of the content. In order to prevent this, more is written and in the end we find ourselves with documents which, although full of contradictions, are rarely, if ever, read by anyone – that is until something goes wrong.

The basic objective which Argentina was trying to achieve after it blew itself up and restructured its debt last time is clear. That there are inconsistencies buried in the paperwork is neither here nor there. That the country could afford to pay the holdouts is also not disputed. What is the worry is that if Buenos Aires tries to close this can of worms, it opens a much bigger one as a result. It is hard to play a sensible game of poker when everyone knows what cards everyone else has got.

What we have, should one feel less charitable towards the US legal system, is an unshakable belief that the courts of New York can dictate how the world has to work and that they are absolutely and indisputably right. We already have the Yanks to thank for finding ourselves being sued for assault for having bumped into someone on the escalator or for sexual harassment for having complemented a female colleague on the pretty dress she had been wearing.

American courts would do well to spend more time considering what the intention was and not what one lawyer got rich writing in order to help another lawyer get rich interpreting. The key consideration should be as to what the client wanted to achieve, not how legal counsel’s junior underlings might have worded it at the end of a 72-hour stint in the office.

I keep hearing Argentina under attack for not being prepared to compromise. What about their US-based opponents? If it is true that there is no such thing as a bad credit, just a wrong price and if that price cannot be par, then who is villain of the piece, the intransigent idiot in the equation?

Running out of steam?

Elsewhere, in Japan June Industrial Production fell by a very painful 3.3%, way behind the consensus forecast of –1.2%, which brought annual output down to 3.2% from an estimated 5.2%. Is Abenomics running out of steam and is the hurdle of the demographic time-bomb going to prove to be too big for the country to scale? Tomorrow we also get June Construction Orders, Vehicle Production and Housing Starts. If they don’t contradict today’s releases, then time has possibly come to kiss the great Japanese recovery story goodbye.

Perhaps going to Goodwood and putting a few quid on the odd bit of horseflesh here and there is just as good an investment strategy as any other and, as things appear at the moment, not one with significantly lower return prospects either.

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