When vultures land in the Hamptons
Today’s tale of hedge fund / Hamptons excess comes from Mitchell Freedman at Newsday; if that story is paywalled, you can find pickups in all the usual places. But it’s the Daily Mail which has the best map:
For most readers, this story is just another glimpse into the hedge-fund lifestyle, where one man will spend $120,000 for a one-foot-wide strip of land — not so that he can get beach access (he already has that) but rather to ensure that his next-door neighbor loses his beach access. As the Daily Mail puts it, Kyle Cruz, who owns the house behind Marc Helie, is now “hemmed in”, and can no longer reach the beach directly from his home. Here’s Freedman:
The auction “caused quite a stir,” Thompson said.
Based on reports from staffers who ran the auction, he said, “I gathered one guy really did not want the other one walking over his property to the water.”
Helie’s purchase effectively gives him narrow slivers of property on both the east and west sides of Cruz, who would have to walk on Helie’s property to reach the ocean beach a few hundred feet away.
To a small set of sovereign-debt geeks with long memories, however, it’s not the beach-access politics which jumps out from this story — it’s the name Marc Helie. For back in 1999, Helie was the man who loved to take credit for forcing what was in many ways the first ever sovereign bond default. And Helie’s actions 14 years ago are actually rather similar to what he’s doing now, in the Hamptons.
Sovereign bond defaults are relatively commonplace these days — even Greece got in on the game. But back in 1999, there was something special about sovereign foreign-law bonds (as opposed to loans): they always managed to avoid being restructured when a country defaulted on its debt. Even Russia, in its catastrophic 1998 sovereign default, always remained current on its Eurobonds.
When Ecuador got into fiscal trouble in 1999, then, its first instinct was not to default on its bonds — even though the IMF was rumored to be pushing it to do exactly that. The bonds in questions were Brady bonds — restructured loans — which included various guarantees, in the form of built-in Treasury bond collateral, which could be used to make payments if and when Ecuador got into trouble. So Ecuador proposed that it would pay the coupons on the bonds without collateral in full, and it would dip into collateral to make payments on its other bonds, while trying to work out a longer-term solution.
But Ecuador’s tactics were atrocious: the country’s announcement came right in the middle of the IMF annual meetings, the one time of the year when all the world’s emerging-market bond investors converge on the same city at the same time. Those investors were not happy, and it wasn’t long before a vocal group of them, led most visibly by Helie, started agitating for highly aggressive action against the country.
Normally, of course, bondholders don’t want borrowers to default — and Ecuador was hoping that this case would be no different. But rather than accept Ecuador’s deal, which treated different classes of bonds differently, and which was very vague, Helie and other bondholders decided that they would rather force the matter. They discovered that if they could organize 25% of the holders of the affected bonds, and get them to write a very specific letter to the bonds’ fiscal agent in New York, they could accelerate those bonds. Rather than just owing a single coupon payment, Ecuador would then owe the entire principal amount, plus all future coupon payments, immediately.
No one expected that Ecuador could pay such a sum, but Helie and the other bondholders just wanted to make things simple. If Ecuador was going to effectively default on certain bondholders, then they would make it official, and force the country into a full-scale bond restructuring, the likes of which the world had never seen. Brady bonds were specifically designed to be very difficult to restructure: any change in the payment terms needed the unanimous consent of bondholders, and there were so many bondholders that unanimous consent was always going to be impossible to find.
Finding 25% of bondholders, however, to block what Ecuador wanted to do, was much easier — and that’s exactly what Helie did. Essentially, Ecuador expected that it could just walk down to the beach and do its bond exchange relatively easily. Instead, it found that hedge fund managers like Helie bought up property which would prevent it from doing that. When Helie et al accelerated Ecuador’s bonds, they forced it to enter into a far more elaborate and convoluted restructuring, in much the same way that Kyle Cruz now needs to walk much further to get to the beach.
Helie worked very hard and spent a lot of money on making life as difficult for Ecuador as he possibly could — in violation of the general assumption that bondholders tend to want what’s best for any given debtor nation. His plan worked, too: the exchange that Ecuador eventually unveiled was much more generous than the market expected, and Helie made a lot of money on his bonds. He was also lionized on the front cover of Institutional Investor magazine, under the headline “The Man Who Broke Ecuador”. It was all very welcome publicity for a man who was punching well above his weight: his hedge fund managed only about $10 million, and behind the scenes other, much more established (and much more publicity-shy) hedge funds had done most of the hard work of organizing the acceleration.
Helie was flying high, enjoying all the stories about the young hedge-fund manager with a ponytail and an office above a modeling agency, who was shaking up the world of sovereign debt. But while his hedge fund, Gramercy Advisors, went on to much bigger things, moving out of the small offices in Manhattan and into much larger digs in Connecticut, Helie didn’t last long. He was spending too much time at his beach house, and eventually his partners decided that he wasn’t doing enough work, and effectively kicked him out of the business.
Evidently, however, old habits die hard; Helie was so adamant that he didn’t want Cruz walking past his house to the beach that he spent $120,000 to make Cruz’s life as difficult as possible. It might even be enough to make a hardened hedge-fund manager start to feel a bit of sympathy for the government of Ecuador.