An indication that $14 million the San Bernardino County Employees’ Retirement Association has invested in an Argentine province’s government bonds and a significant portion of $555.8 million in the association’s $12 billion pension fund entrusted to a financial advisor is in jeopardy came this week when two lawsuits were filed in a federal court in New York.
That investment advisor, GoldenTree Asset Management LP, and the county’s retirement association on Tuesday filed parallel legal actions against the Province of Buenos Aires, which has skipped out on its debt service relating to bonds that province issued in which the county retirement fund is heavily invested.
The San Bernardino County Employees’ Retirement Association, known by its acronym SBCERA, manages the monetary pool that provides the pensions for retired San Bernardino County employees, as well as for the retirees from 15 other public agencies, including the Barstow Fire Protection District, the Big Bear Fire Authority, the California Electronic Recording Transaction Network Authority, the California State Association of Counties, the City of Big Bear Lake, the City of Chino Hills, the Crestline Sanitation District, the Department of Water & Power of the City of Big Bear Lake, the Hesperia Recreation and Park District, the Law Library for San Bernardino County, the San Bernardino County Local Agency Formation Commission, the Mojave Desert Air Quality Management District, the San Bernardino County Transportation Authority, the South Coast Air Quality Management District, the Superior Court of California, as well as the staff for the San Bernardino County Employees’ Retirement Association itself.
SBCERA and those associated with it have long touted it as one that is more competently managed and which achieves greater investment returns than the pension system for the State of California and an overwhelming number of the municipal and county governmental entities in the state, the California Public Employees Retirement System.
The San Bernardino County Employees’ Retirement Association employs more than 30 different investment advisors to which it entrusts its assets for investment. The seventh largest of those advisors, in terms of the volume of the investment capital being overseen, is GoldenTree Asset Management LP, which has been entrusted with overseeing the investment of $555,827,084 of SBCERA’s investment capital, representing 4.64 of the association’s portfolio. GoldenTree Asset Management LP is a credit-focused independent asset manager and hedge fund which manages over $40 billion for institutional investors including leading public and corporate pensions, endowments, foundations, insurance companies and sovereign wealth funds. On the hedge fund side, GoldenTree at present directs the management of $28,036,837,532 in investments for 99 clients primarily in the private sector.
GoldenTree exists in a multitude of sub-entities, which include GoldenTree Co-Invest Master Fund II Ltd.; GoldenTree Co-Invest Distressed Master Fund III Ltd.; GoldenTree Co-Invest Distressed Onshore Master Fund III Ltd.; GoldenTree Emerging Markets Master Fund ICAV; Goldentree Insurance Fund Series Interests of SALI Multi-Series Fund, LLP; GoldenTree Master Fund, Ltd; GoldenTree Sector-C LP; GoldenTree NJ Distressed Fund 2015 LP; and GoldenTree V1 Master Fund, LP.
Argentina is the third richest country in South America in terms of gross domestic product per capita. The Province of Buenos Aires is one of 24 provinces in Argentina. At 118,754 square miles and with 17,196,396 inhabitants as of 2018, the Province of Buenos Aires is the largest of the country’s provinces geographically and in terms of population. While it surrounds the City of Buenos Aires, it is separate from that metropolitan entity, which exists as a smaller province in its own right. The Province of Buenos Aires’s economy has long been and remains the largest in Argentina, with a per capita income exceeding $28,000 per year. The Province of Buenos Aires is Argentina’s chief exporter, having generated nearly $107 billion in exports in 2016, 37 percent of the nation’s total. The province’s economy is well-diversified. The province is renowned around the world for its agricultural productivity. Argentina is the world’s sixth largest source of beef, and the Province of Buenos Aires is responsible for the lion’s share of the country’s production of that commodity, and it is also Argentina’s top producer of mutton, pork, and poultry. It is likewise the center of the country’s dairy industry. A variety of crops are grown in the province, with the most important being corn, wheat and soybeans, as well as those grown for oil seeds, such as sunflower and flax. In recent years, the region has established itself as a producer of premium wines, which are the product of wineries that flourish in the south of the province. Manufacturing accounts for a fourth of the province’s economic output and is about 40 percent of that in the entire nation. The Province of Buenos Aires is an industrial powerhouse, involving the production of chemicals, pharmaceuticals, metallurgically-advanced materials, motor vehicles, machinery, textiles and processed foods.
In January 2006, the Province of Buenos Aires made the first of a series of six bond issuances, variously referred to as notes, indentures or global certificates, all of which were authenticated by the Bank of New York. The first issuance, denominated in U.S. dollars, had an annual interest rate of 4 percent, and matured on May 1, 2020, with the payment of the principal due to be made in semi-annual installments beginning in November 2017. The second issuance, denominated in Euros, had an annual interest rate of 4 percent, matured on May 1, 2020, with the payment of the principal due to be made in semi-annual installments beginning in November 2017. The third issuance, denominated in U.S. dollars, had an annual interest rate of 10.875 percent, matured on January 26, 2021, with the payment of the principal due in three installments, 33.33 percent on January 26, 2019, 33.33 percent on January 26, 2020 and 33.34 percent on January 26, 2021. The fourth issuance, denominated in U.S. dollars, has an annual interest rate of 9.625 percent, is to mature on April 18, 2028, with the payment of the principal due to be made in three annual installments of 33.33 percent on April 18, 2026, 33.33 percent on April 18, 2027 and 33.34 percent on April 18, 2028. The fifth issuance, denominated in U.S. dollars, has an annual interest rate of 4 percent, will fully mature on May 15, 2035, with the payment of the principal due to be made in semi-annual installments beginning in November 2020. The sixth issuance, denominated in Euros, has an annual interest rate of 4 percent, is to fully mature on May 15, 2035, with the payment of the principal due to be made in semi-annual installments beginning as of November 2020.
From 2003 until 2007, Néstor Carlos Kirchner Jr. was Argentine president. During Kirchner’s tenure, in January 2006, Argentina undertook a comprehensive restructuring of its foreign debt following the country’s 2001 default on $82 billion in sovereign bonds. Under that restructuring, Argentina committed to repaying 76 percent of the $82 billion – $62.32 billion – owed to the nation’s creditors. Néstor Kirchner was succeeded by his wife, Cristina Elisabet Fernández de Kirchner, who remained as president from 2007 until 2015. Both Kirchners were dogged by corruption scandals. Mauricio Macri succeeded Cristina de Kirchner as president, serving from 2015 until 2019. Alberto Ángel Fernández is the current Argentine president.
Deficit spending by the Kirchner, Kirchner, Macri and Fernández governments has created persistent economic challenges, including inflation and resultant devaluation of the Argentine Peso, which since May of last year dropped in value from 1.52 U.S. cents to its current 1.1 cents. In 2017, the Argentine economy slipped into a definable state of recession, and within a year of that, defaults among certain sectors of the Argentine financial sector began. The Argentine government and its banking system as a whole find themselves low on currency and gold, thus unable to stay current with debt payments. Having previously been bailed out by the International Monetary Fund (IMF), the government was adhering to a debt amortization schedule, but was unable to keep pace with that burden when its reserves were entirely depleted by late 2019.
In March 2020, with the advent of the coronavirus pandemic, the Argentine economy tanked entirely, and the nation’s economy contracted by 11 percent January though December 2020. In April 2020, across the board, Argentine companies and governmental entities ceased virtually all debt service payments, including those relating to the bonds issued by the Province of Buenos Aires. On May 22, 2020, Argentina defaulted on a $500 million interest payment due to its international creditors. In September 2020, Argentina, in a déjà vu scenario virtually indistinguishable from what had occurred following the 2001 default, began negotiations, overseen by the International Monetary Fund, for the restructuring of $66 billion of its debt. The IMF, which is itself owed $44 billion by Argentina, has cut Argentina off from international lenders, calling upon the country’s national leaders to develop an internal economic self-sufficiency model to structure the nation out of its financial doldrums through the reduction of inflation and the optimistic expectation that the Argentine economy can recover enough to achieve 4.5 percent growth in 2021.
Against this backdrop, GoldenTree Asset Management LP had been in quiet negotiations throughout much of last year and the first two months of this year with Buenos Aires Province over some order of a payment plan with regard to the delinquent bond debt servicing. By last week, the already tense relationship between the two parties had reached an impasse. On March 21, Buenos Aires Province publicly disclosed it would not be returning to those negotiating sessions. Within 24 hours, GoldenTree had made a public statement of its own, propounding through its public relations team of Steve Bruce and Mary Beth Grover, “While GoldenTree entered into the discussions with the province in good faith with the aim of achieving a consensual resolution, our hope that the province would pursue a realistic approach to the bond restructuring process was not realized. The amended restructuring terms provided to us by the province, which were published yesterday, do not come close to reflecting the current payment capacity and economic prospects of the province. This is not a case of a province that cannot pay a reasonable amount of debt service to its bondholders due to fiscal constraints, but rather of one which is simply unwilling to do so. The choice of the authorities to pursue this path is unacceptable and risks permanently impairing the province’s access to capital markets.”
The following day, GoldenTree in the form of its various funds, together with the San Bernardino County Employees’ Retirement Association; Beauregarde Holdings, LLP; MA Multi-Sector Opportunistic Fund, LP; Kapitalforeningen Industriens Pension Portfolio; Guadalupe Fund LLP; High Yield And Bank Loan Series Trust; FS Credit Income Fund; GN3 SIP Limited, Crown Managed Accounts SPC; Greylock Capital Management LLC; Pinehurst Partners LP; the Louisiana State Employees’ Retirement System; Amundi Funds, Caius Capital Master Fund; Corbin Erisa Opportunity Fund, LTD; and Amia Capital Master Macro Fund, Limited, represented by Attorney Glenn M. Kurtz of the international law firm White & Case, filed two lawsuits against the Province of Buenos Aires in United States District Court for the Southern District of New York.
The first complaint seeks judgment in favor of each plaintiff against the province in the aggregate amount of approximately $30 million plus interest and principal amounts that come due and are not paid after the date of the complaint, along with all legal and court costs. The second complaint seeks judgments in favor of the plaintiffs against the province in the aggregate amount of approximately $336 million as of the date of the complaint, the interest and principal amounts that come due and are not paid after the date of the complaint and all legal and court costs.
In reaction to the legal filings, Buenos Aires Province Minister of Finance Pablo López told Silvinal Kristal of the publication Ámbito Financiero on March 23, “First of all, it has to be said that these types of actions are the same as those we have already seen in other provinces, which in itself does not surprise us, and it is a mechanism of pressure that is often used. This judicial strategy does not favor the resolution of the problem.”
Vowing the province would not be pressured, López said Buenos Aires Province officials “remain open to dialog,” but only on terms that would achieve a resolution “without jeopardizing the fragile situation of the province.”
GoldenTree was proving, López said, “intransigent” in the discussions with regard to the Buenos Aires Province coming to terms with its arrearages “where they require us, for example, to commit ourselves to pay in the next four years 2 billion dollars, which is the equivalent the province’s public works activity for two years. To comply with what they are asking, we would have to stop doing capital improvement work for two years, and with doing work I mean repairing schools and hospitals, strengthening the health system, stopping making roads and houses throughout the province. Thus, it is not sustainable in terms of what it is possible for the province to pay, either in social terms or in terms of the province’s needs.”
López said the timing of the lawsuits was suspicious in that they were filed on the very day Argentine Finance Minister Martín Guzmán was meeting in Washington, D.C. with IMF Managing Director Kristalina Georgieva to reinitiate negotiations with regard to Argentina’s debt of nearly $45 billion to the International Monetary Fund.
There remains a lack of clarity with regard to how much, precisely, of San Bernardino County Employees’ Retirement Association’s investment funds remain in jeopardy because of the Buenos Aires Province’s default. At least $14 million directly originating with the county employees’ pension system is tied up in Buenos Aires Province coupons. SBCERA has also entrusted $555.8 million to GoldenTree and its various entities. GoldenTree has $786,656,568 invested in Buenos Aires Province, including $166,087,368 in 9.95 percent notes due in 2021; $90,571,200 in 5.375 percent notes due in 2023; $55,745,000 in 6.5 percent notes due in 2023; $180,184,000 in 9.125 percent notes due in 2024 and $294,069,000 in 7.875 percent notes due in 2027. Because of confidentiality policies, how much of that $786.65 million sunk into Province of Buenos Aires bonds by GoldenTree consists of investment money provided to GoldenTree by the San Bernardino County Employees’ Retirement System cannot be determined at present.
Olivia Applegate, the spokeswoman for the San Bernardino County Employees’ Retirement Association, suggested that although the two suits brought in the United States District Court for the Southern District of New York had gotten some attention, the Province of Buenos Aires giving SBCERA and its other creditors the runaround wasn’t all that big of thing in the overall scheme of things, given the scope of the funds the association is involved in investing and the timeframe during which returns on those investments play out.
“SBCERA is a long-term investor, with a globally diversified portfolio, and the fund has had a net annualized return of 8.9 percent since July 1982,” Applegate said. “SBCERA currently invests more than $12 billion in assets. Our position size with the Province of Buenos Aires is approximately $14 million, which is just over one-tenth of one percent of the total portfolio.”
Applegate said, “In April 2020, the Province of Buenos Aires stopped making scheduled payments on the notes in question, mentioned in a recent Wall Street Journal article. In response, GoldenTree Asset Management is using this action to enforce their and SBCERA’s rights as a creditor and as a driver for the next steps in the process.”
Applegate added that “GoldenTree named SBCERA as a plaintiff in this case in order to maximize value for the position as a fiduciary to the account.  Had SBCERA not been named as one of the plaintiffs alongside the creditor group, SBCERA could potentially be treated differently in a workout situation and might not be entitled to certain benefits that could arise out of a settlement of the suit.”