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Business Observer Friday, Feb. 13, 2004 15 years ago

Squeezing Argentina

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Kenneth Dart, the former Sarasotan, is hoping to squeeze Argentina to pay him the full amount on its debt - even though he bought it at a discount.

Squeezing Argentina

Kenneth Dart, the former Sarasotan, is hoping to squeeze Argentina to pay him the full amount on its debt - even though he bought it at a discount.

By Johannes Werner

Contributing Editor

Kenneth Dart, an heir to Dart Container Corp.'s styrofoam cup fortune, is known as a guy who plays financial hardball against entire nations. And he apparently has no mercy.

When a nation is at the brink of default, Dart invests hundreds of millions of dollars in its bonds. Typically, he buys a sizable chunk of debt of a struggling nation at steep discounts on the secondary market. After the default, he sues the government for repayment of the face value of his bonds, plus accrued interest.

That approach has stirred controversy, to say the least, but it has proven extremely beneficial for the Dart family's fortunes.

The Darts are probably Sarasota's wealthiest property owners. They probably took the top spot in 1989 when they moved the headquarters of Dart Container Corp. from Michigan to Sarasota. Although Kenneth Dart, since renouncing his U.S. citizenship in 1994, can only spend an average two months per year here and resides mainly on Cayman Island (he carries a Belizean and an Irish passport), his family continues to be based in Sarasota County.

Ten years ago, the styrofoam man put himself on the map of international finance by buying up 4% of Brazil's foreign debt. In 1996, the South American power settled with Dart, resulting in a payout that amounted to a 181% profit margin.

In the Ecuadorian undertaking, he amassed 40% of the small Andean country's foreign debt. Dart then played a crucial role in the renegotiation of Ecuador's debt, which concluded in 2000 with a relatively modest 40% "haircut" for creditors. Even though he obtained the same treatment as all other private creditors, that still amounted to an estimated 67% return for Dart.

So how about the battle of Argentina's bonds?

This time, he is keeping his stakes lower. EM Ltd., a Dart-controlled entity based on Cayman, invested around $120 million in November and December 2001 in Argentinean bonds. EM bought the paper at an estimated 20 cents on the face-value dollar, just days before the South American nation of 38 million presented the world with the Christmas gift of stopping to serve its $181 billion foreign debt.

That produced the largest default ever. The country, which had been a poster boy of market-oriented policies, uncoupled its peso from the dollar, which triggered a devaluation, and froze the bank accounts of its citizens. This spurred political unrest. By the end of 2003, the GDP had dropped 15% below that of 1997, and half the population is now living below the poverty line. The country only regained a degree of stability when left-leaning Nestor Kirchner was voted into office in 2002.

Surprisingly early, long before Argentina had even begun negotiations with private creditors, Dart proceeded in April 2003 to sue the republic in a U.S. court - the Southern District of New York in Manhattan. The early filing helped him avoid the tight spot he was in with Ecuador. Four years ago, Ecuador's lawyers artfully circumvented the limitations of New York law by including take-it-or-leave-it exit consents in bondholder clauses. Back then, Dart had no other choice but to accept the same treatment his peers received.

To the surprise of some observers, in September Judge Thomas P. Griesa ruled in Dart's favor, allowing EM to "recover" $724 million (that's the $595 million face value of Dart's bonds, plus interest). What's more, the judge granted Argentina only two temporary stays of 45 days each to get negotiations with private creditors going. Dart could begin to collect from Argentina this month.

Dart hasn't hit the jackpot yet.

Dart can't change the locks at the Argentinean embassy in Washington, or taxi Argentina's presidential jet off to auction. He doesn't want to get into the auction business, anyway. As one of his lawyers put it during a January hearing: "We're not interested in [Argentina's] embassy limousines around the world." Dart's right to collect is limited to commercial assets, and after a thorough wave of privatizations in the 1990s, the Argentinean state has probably no substantial assets in the United States.

Although he's widely seen as one of them, Dart doesn't want to be part of a flock of vultures, says one observer.

"The Darts' problem is the neighborhood," says LatinSource analyst Guillermo Mondino, a former chief adviser to the government of Ecuador and ex-secretary for economic policy in Argentina.

While Dart has a blunt approach, he's not trying to wreck a system he's been living off handsomely.

"The Darts play hardball, but they know when and how to give and take," Mondino says.

Dart knows that his lawsuit could well derail or substantially delay an unusually complex debt renegotiation process that involves 500,000 creditors around the globe. And such an event would increase political counter-pressures. Also, while Dart probably has little sympathy for the International Monetary Fund, he doesn't want to drop the wrecking ball on the IMF. He needs this taxpayer-funded lender of last resort because it enables countries such as Argentina to actually pay him off.

Another built-in contradiction in Dart's strategy is the fact that every lawsuit filed by a fellow creditor reduces his chances for a payday. In other words: Too much obvious success in court would attract too many other suitors.

Therefore, the value of the judgment for Dart is not so much in that he could actually go out and collect on it. Rather, it gives Dart enough leverage to produce long-term headaches in Buenos Aires. Argentina's leaders know that to regain good financial standing, they'd better not have the repo man knocking at the door.

To be sure, Argentina is playing hardball, too. The country must get significant concessions from its private creditors to be economically viable. "Right now because they're not making a payment on the $100 billion private debt], their cash flow has improved," says Randall Dodd, president of the Washington-based Financial Policy Forum. "They're finding out that the status quo isn't a disaster for them. Maybe, if they did pay their debt it would not result in bigger inflows of capital. So they may be better off with no outflows than with outflows and no inflows at all."

In September, Lavagna infuriated private creditors by proposing to pay 25 cents on the dollar (this would still mean an estimated 25% profit for Dart, minus legal costs). The administration hasn't budged since, and Kirchner justified the low-ball proposal by saying that Enron creditors accepted 18 cents on the dollar. His government isn't likely to make a meaningful offer before June, and a resolution isn't expected before 2005.

So what's Dart's ultimate goal? Argentina's lawyers described Dart's attitude in court hearings as "cagey." Not surprisingly, he and his lawyers declined to go on the record with GCBR. But in all likelihood, he still believes he can get a settlement with a higher payout than that of his peers.

So far, though, Argentina doesn't look like it's willing to make it easy for him. There's a lot of tough talk and walk emanating from Buenos Aires. Economy Minister Roberto Lavagna said about Dart in a TV interview that he buys bonds "for no other reason than to sue governments," adding that Argentina won't pay a dime to bondholders who sue.

More important, the government retained probably the most experienced counsel it could get - New York law firm Cleary Gottlieb, which represented Ecuador in its 1999-2000 renegotiation.

Stay tuned.

Johannes Werner is a Sarasota-based business journalist. He publishes a trade monthly, Cuba Trade & Investment News. He can be reached at [email protected].

ORIGIN OF DART'S FORTUNE

In the late 1950s Dart's father, William A. Dart, and grandfather, William F. Dart, developed a machine that could mold polystyrene beads into cups. Dart Container Corp. is now the world's largest manufacturer of foam cups.

According to a 1995 Business Week article, Dart Container has helped to keep its hold on the industry by taking the paradoxical step of never patenting the process by which its cups were made. Taking out a patent would mean revealing the process and, since patents run out eventually, giving the company's secrets away to competitors.

The Darts have preferred to take the route of extreme caution, letting only a few of their own employees even see the machines that have made them rich.

Dart Container currently employees more than 3,000 people at 17 plants worldwide. Different sources have estimated yearly revenues for the privately held company from $400 million to more than $1 billion. It regularly figures on the Fortune magazine list of the top 400 private companies.

By all accounts, Dart has become an incredibly successful investor, as a 1986 restructuring of the family trusts freed up company profits for him to bring a return on. According to the Business Week article, within three years Dart made a return of 186% on a $269 million investment in Salomon Inc.

St. Petersburg Times, 1999

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