The New York Times - USA (2020-08-01)

THE NEW YORK TIMES BUSINESSSATURDAY, AUGUST 1, 2020 Y B3

VIRUS FALLOUT | MEDIA

to reject it, while holding out for a
marginally improved deal.
Mr. Fink has inserted himself
into the negotiations, speaking
twice with Argentina’s economy
minister, according to three peo-
ple familiar with the talks. The
government and its creditors are
only three pennies on the dollar
apart on their proposed terms.
“The BlackRock guys have got-
ten on the phone with a number of
significant creditors,” said Hans
Humes, president of Greylock
Capital Management, another
creditor at the table. “They con-
vinced a lot of people that if we all
stepped up behind their deal, the
Argentines would take it. It’s
turned into a brutal standoff.”
BlackRock’s stance has put it at
odds with the International Mone-
tary Fund, which gave Argentina
a rescue package worth more than
$50 billion two years ago, and has
supported Argentina’s proposal
as a Tuesday deadline ap-
proaches.
The fund’s managing director,
Kristalina Georgieva, has praised
Argentina’s approach and empha-
sized that bondholders must
agree to substantial debt forgive-
ness so Argentina can manage fu-
ture payments. Fund officials
have assured the government that
they will forge a new bailout if Ar-
gentina cannot complete a deal.
The alternative would be an un-
ruly default that would prevent
Argentina from tapping interna-
tional markets, block its compa-
nies from gaining access to capital
and deepen the recession.
BlackRock’s position has also
put it crosswise with a group of
prominent economists, including
the Nobel laureates Joseph
Stiglitz and Edmund Phelps. In
May, they issued a public letter
urging bondholders to come to
terms with the government.
“Argentina has presented a re-
sponsible offer to creditors that
reflects the country’s capacity to
pay,” declared the letter, which
was signed by 138 economists,
among them Carmen Reinhart,
now the chief economist at the
World Bank.
In a statement, BlackRock said
it had been working diligently to
achieve a settlement, while re-
couping as much as possible for its
clients. Roughly two-thirds of the
investments it manages comprise
the retirement savings of workers
around the world.
“In this restructuring process,
our fund managers are balancing
a fiduciary obligation to make de-
cisions in the best interest of these
savers, while at the same time rec-
ognizing the difficult circum-
stances facing the Argentine gov-
ernment, including the challenges
posed by Covid-19,” the statement
said.
The standoff in Argentina re-
flects the complexity of debt nego-
tiations in an era in which regular
people are effectively at the table.
In decades past, bonds issued by
developing countries were over-
whelmingly controlled by major
banks. When governments could
not pay, bank chiefs hammered
out a deal. Today, investors hold-
ing emerging market bonds run
the gamut from specialized funds
with high tolerance for risk to con-
servative pension funds.
That Mr. Fink’s company is
playing a primary role in pressur-
ing Argentina contrasts with his
campaign to make business a
force for social progress.
Two years ago, Mr. Fink — who
has been mentioned in news re-
ports as a potential Treasury sec-
retary in a Joseph R. Biden Jr. ad-

ministration — wrote an open let-

ter to the chief executives of major

corporations urging them to focus

on social, labor and environmen-

tal concerns.

“To prosper over time, every

company must not only deliver fi-

nancial performance, but also

show how it makes a positive con-

tribution to society,” he wrote.

Last year, Mr. Fink signed the

Statement on the Purpose of a

Corporation put together by the

Business Roundtable, an associa-

tion of American chief executives.

It pledged “a fundamental com-

mitment to all of our stakehold-

ers.”

In January, Mr. Fink wrote an-

other letter to C.E.O.s warning

that companies that failed to ad-

dress climate change would be

punished in the marketplace.

BlackRock has started funds

tailored to so-called impact invest-

ing, with money directed at ad-

vancing social and environmental

goals.

Argentina is now consumed

with stemming an alarming in-

crease in poverty. Once among the

richest countries, it has defaulted

on its government debt nine

times.

Argentina’s history has been

dominated by populist govern-

ments that have won political fa-

vor by dispensing subsidies and

cash to the masses in brazen dis-

regard for budget arithmetic,

yielding chronic inflation and fre-

quent crises.

The last government, headed

by President Mauricio Macri, as-

sumed power in 2015 with a man-

date to restore discipline toward

regaining the confidence of inter-

national markets, while also

showing compassion to the poor

through social spending.

Among those impressed was

Mr. Fink. Six months after Mr.

Macri took office, the BlackRock

chief said his administration “has

really shown what a government

can do if it is focusing on trying to

change the future of its country.”

In the end, Mr. Macri acquired a

reputation for muddling through,

failing to produce growth while

borrowing anew.

When a new president, Alberto

Fernández, took office last year,

many assumed that populism was

back. But Mr. Fernández quickly

reassured the I.M.F. and key cred-

itors that he was a pragmatist in-

tent on securing a workable debt

settlement.

The I.M.F. had long been ac-

cused of wielding a single blunt in-

strument in the face of crisis: aus-

terity. Its rescue package in Ar-

gentina two decades ago imposed

crippling cuts to government pro-

grams, sowing enduring bitter-

ness. Ms. Georgieva, the fund’s

managing director, has sharpened

a focus on protecting countries

from impossible debt burdens.

BlackRock is part of a consor-

tium called the Ad Hoc Argentine

Bondholder Group, which con-

trols about one-fourth of the

bonds.

The Ad Hoc group has struck a

unified front in rejecting the gov-

ernment’s latest offer, which

would pay out 53 cents on the dol-

lar value of the bonds. Last week,

it presented its own proposal

seeking improved terms — more

than 56 cents on the dollar.

In a letter sent on Monday to Ar-

gentina’s economy minister,

Martín Guzmán, the group said it

had gained the support of a major-

ity of all bondholders, giving it the

power to block the deal. Under the

bond covenants, an agreement to

write down their value must win

the support of the holders of two-

thirds of their value.

In a statement, the Ad Hoc

group said it was operating in the

interest of the Argentine public by

seeking a deal that would “allow

re-access to capital markets and

encourage further investment.”

But some creditors have pub-

licly supported the government’s

proposal.

“Argentina has made a reason-

able offer, which I believe the

creditors should accept, espe-

cially in light of the health and

poverty situation in the country,”

said Mohamed A. El-Erian, chief

economic adviser at Allianz SE,

the parent company of Pacific In-

vestment Management Company,

one of the world’s largest bond

managers. He has been advising a

creditor at the table, Gramercy

Funds Management LLC, an

emerging-markets specialist, and

serves as its chairman.

Gramercy has concluded that

differences between the govern-

ment’s offer and the Ad Hoc

group’s proposal are trivial com-

pared with the risk of a compre-

hensive default that would dimin-

ish the value of Argentine bonds,

subject creditors to years of po-

tential litigation and intensify the

nation’s crisis.

Additional debt forgiveness

also enhances the likelihood that

Argentina can manage its future

payments, lifting the value of out-

standing bonds, and lowering bor-

rowing costs for Argentine com-

panies.

“For three points you’re willing

to lose 20 or 30,” said Mr. Humes,

the Greylock president. “It’s just

insanity. It’s unfortunate when

egos and inexperience get in the

way of a pragmatic solution.”

Some say the government over-

played its hand, antagonizing

creditors with an unreasonably

low opening offer — less than 40

cents on the dollar.

“Guzmán started off with a very

lowball offer,” said Siobhan Mor-

den, a Latin America bond analyst

at Amherst Pierpont Securities,

an independent broker. “This has

been an unnecessary distraction

for months that could have been

avoided if the opening offer had

been more reasonable.”

Negotiations were conducted

via Zoom, involving dozens of dif-

ferent creditors. BlackRock’s rep-

resentatives clashed with Mr.

Guzmán, a 37-year-old economist

who studied with Mr. Stiglitz at

Columbia University.

In May, Mr. Fink called Mr.

Guzmán to try to break the im-

passe, suggesting that a deal

could be had if the government

lifted its offer to the range of 50 to

55 cents on the dollar, the people

familiar with the talks said.

In private consultations with

BlackRock, the government of-

fered 50 cents. But BlackRock and

its Ad Hoc group held out for

more.

Mr. Fink complained that it was

unfair that private creditors were

swallowing all the losses, arguing

that the I.M.F. should forgive

some of its loans — a nonstarter.

In early July, Mr. Guzmán

sweetened the terms, offering 53

cents on the dollar. That won the

support of several creditors, in-

cluding Gramercy and Greylock.

By then, the pandemic was

deepening Argentina’s recession

just as the government required

extra funds for the public health

emergency. But BlackRock began

a behind-the-scenes campaign to

block the deal.

The government has insisted

that its offer is final. With child

poverty exceeding 50 percent, of-

ficials say, paying more to cred-

itors would amount to transfer-

ring wealth from people who have

almost nothing to international in-

vestors.

On a recent morning, about 100

families showed up at a soup

kitchen 25 miles west of Buenos

Aires — more than twice as many

as in March. Among them was

Ángel Ariel Coronel, a plumber

who lives nearby with his wife and

their 2-year-old son. A strict lock-

down imposed by the government

has halted the construction

projects where he has worked.

“My wife was a bit embarrassed

about having to come here,” said

Mr. Coronel as he waited for a por-

tion of steaming lentils. “But I

don’t care. We need the help. I ha-

ven’t worked a day since this

whole thing started.”

Peter S. Goodman reported from

London, and Daniel Politi from

Buenos Aires.

Argentina’s Debt Tests BlackRock’s Progressive Investing

FROM FIRST BUSINESS PAGE

Argentina, where poverty is soaring amid the pandemic, seeks forgiveness on $66 billion in bonds. BlackRock helped block a proposed settlement.

ALEJANDRO PAGNI/AGENCE FRANCE-PRESSE — GETTY IMAGES

Balancing a nation’s

woes with duties to

individual investors.

At the beginning of this week, the
Eastman Kodak Company handed
its chief executive 1.75 million
stock options.
It was the type of compensation
decision that generally would not
attract much notice, except for
one thing: The day after the stock
options were granted, the White
House announced that the com-
pany would receive a $765 million
federal loan to produce ingredi-
ents to make pharmaceuticals in
the United States.
The news of the deal caused Ko-
dak’s shares to soar more than
1,000 percent. Within 48 hours of
the options grants, their value had
ballooned, at least on paper, to
about $50 million.
The government loan is part of
a broader federal effort to in-
crease the country’s ability to re-
spond to the coronavirus and fu-
ture pandemics.
The options grant to Kodak’s ex-
ecutive chairman and chief execu-
tive, Jim Continenza, is the latest
example of executives and board
members at companies receiving
such federal support to benefit
from extraordinarily good timing.
A number of those companies are
involved in the hunt for vaccines
and treatments for the coro-
navirus.
Insiders at Vaxart, for example,
received stock options shortly be-

fore the California biotech com-

pany announced in June that its

potential vaccine was being tested

in a program organized by a fed-

eral agency, causing its shares to

instantly double.

A Kodak spokeswoman de-

clined to comment on the timing of

the stock-options grants and em-

phasized that the value of the op-

tions could change before Mr. Con-

tinenza uses them to buy Kodak

shares.

Kodak, best known for its iconic

camera and film business, has

been struggling for years to re-

invent itself. The company

emerged from bankruptcy protec-

tion in 2013, and its shares in re-

cent years have mostly been trad-

ing at $2 or $3, giving it a market

value of about $100 million.

Starting in May, Kodak began

talks with the Trump administra-

tion about manufacturing the in-

gredients for pharmaceuticals,

Mr. Continenza said in a television

interview this week.

The deal was announced on

Tuesday. President Trump said

the federal loan from the U.S. In-

ternational Development Finance

Corporation would help reduce

the United States’ reliance on

other countries, in particular

China and India, for the vast ma-

jority of ingredients used to make

generic drugs. Mr. Trump called

the Kodak deal “a breakthrough in

bringing pharmaceutical manu-

facturing back to the United

States.”

Kodak said it was creating a

new pharmaceuticals division and

will expand its facilities in Roches-

ter, N.Y., and St. Paul, Minn. The

division will eventually have the

capacity to produce as much as 25

percent of the active ingredients

used in generic drugs in the

United States. Kodak has been in

the chemicals business for more

than a century

and “has the fa-

cilities sitting

there ready to

go,” Mr. Conti-

nenza said in a

television inter-

view this week.

It is unclear

whether the in-

gredients that

Kodak makes will have any role in

the fight against the coronavirus.

Kodak will coordinate with the

federal government and other

manufacturers to figure out which

ingredients to make, prioritizing

those that are deemed critical to

Americans and national security.

The day before the loan was an-

nounced, trading in Kodak shares

surged, and its stock jumped

about 25 percent, closing at $2.62

a share. That activity raised suspi-

cion about improper trading

ahead of the market-moving

news, but The Wall Street Journal

reported that it was apparently

the result of reports by the news

media in Rochester, where Kodak

is headquartered, about the pend-

ing announcement.

Around the time that Kodak be-

gan talking with the federal gov-

ernment this spring, Kodak insid-

ers began receiving stock options.

The pattern was first reported by

Non-GAAP Thoughts, a digital

newsletter.

On May 20, Kodak handed out

240,000 stock options to board

members — an addition to its usu-

al equity distribution in January.

The May stock options awarded

to directors are now worth about

$4 million. Those options are eligi-

ble to be exercised gradually over

the course of this year.

Arielle Patrick, a spokeswoman

for Kodak, declined to answer

questions about why the directors

were granted stock options in

May.

On the day that Kodak was

alerting the local news media to

its about-to-be-announced deal

with the Trump administration,

the compensation committee of

the company’s board voted to

award Mr. Continenza 1.75 million

stock options that allow him to

purchase shares at prices ranging

from $3.03 to $12.

By Wednesday morning, Ko-

dak’s shares had soared as high as

$60 each. They have since re-

treated to about $24, which means

the stock options give Mr. Conti-

nenza the right to buy shares at a

deep discount.

Mr. Continenza can exercise

some but not all of the options im-

mediately.

Ms. Patrick said that the rapid

increase in the values of Mr. Conti-

nenza’s new stock options “are pa-

per only,” adding, “Mr. Continenza

has not received any proceeds nor

does he have any intention of sell-

ing.”

She added that Kodak’s board

awarded the options to Mr. Conti-

nenza because when the company

last year issued a type of debt that

converts into equity, the value of

the chief executive’s stock and op-

tions were diluted.

She said that Kodak received

shareholder approval in May to is-

sue additional shares, and that the

compensation committee ap-

proved the options “at the first

meeting of this committee since

the annual stockholders meeting,”

which was on July 27.

She declined to comment on

why Kodak did not wait until after

the White House announcement

to grant the options.

The increase in Kodak’s shares

this week also transformed some

stock options that Mr. Continenza

received when he became chief

executive. They had been effec-

tively worthless because of Ko-

dak’s low stock price. This week,

their value grew to about $59 mil-

lion, Reuters reported.

C.E.O. Got Stock Options, Then Kodak Got Huge Loan

By JESSE DRUCKER

and ELLEN GABLER

Jim Continenza

James Murdoch resigned on Fri-

day from the board of News Corp,

stepping aside from his final for-

mal role within the media empire

of his father, Rupert Murdoch.

“My resignation is due to dis-

agreements over certain editorial

content published by the Compa-

ny’s news outlets and certain

other strategic decisions,” Mr.

Murdoch, 47, wrote in his resigna-

tion letter, which News Corp dis-

closed in a filing shortly after the

close of business on Friday.

News Corp is the newspaper

arm of the Murdoch kingdom,

publishing influential broad-

sheets like The Wall Street Jour-

nal as well as powerful tabloids,

including The Sun of London and

The New York Post. The company

also oversees several papers in

Britain and Australia.

Mr. Murdoch had already de-

parted the Fox Corporation, the

family’s television and entertain-

ment arm that houses Fox News,

after his family transferred many

of its assets to The Walt Disney

Company in a blockbuster sale

that was completed last year.

There were discussions about the

possibility of Mr. Murdoch joining

Disney, but those plans did not

pan out.

Mr. Murdoch netted $2 billion

from the Disney deal. Since then

he has made ef-

forts to rebrand

himself as an

investor who is

focused on en-

vironmental

companies and

causes. In his

time working

under his fa-

ther, he champi-

oned sustain-

ability projects at Sky, the Euro-

pean satellite giant that was for-

merly part of the Murdoch

empire, and helped poured hun-

dreds of millions of dollars into the

National Geographic Society’s en-

dowment fund.

As wildfires raged across Aus-

tralia, the birthplace of Rupert

Murdoch, James Murdoch criti-

cized how Murdoch publications

covered climate change. Rupert

Murdoch has described himself as

a “climate skeptic,” while James

has lately invested millions in

companies that emphasize sus-

tainability.

A spokeswoman for Mr. Mur-

doch declined to comment further

on Friday about the reasons for

his departure, saying the letter

“speaks for itself.”

James Murdoch is the younger

brother of Lachlan, the media ex-

ecutive who in 2018 was named

the head of Fox Corporation,

which includes Fox News, Fox

Business and the Fox television

network.

His father and his brother, who

is co-chairman of News Corp, said

in a joint statement on Friday:

“We’re grateful to James for his

many years of service to the com-

pany. We wish him the very best in

his future endeavors.”

James Murdoch has often been

a political outlier in his family. His

father helped President Trump in

his first campaign, and the prime

time stars of Fox News have reli-

ably championed his policies.

James and his wife, Kathryn

Murdoch, recently contributed

$615,000 each to support former

Vice President Joseph R. Biden

Jr., the presumptive Democratic

nominee for president.

Murdoch Son

Quits Board

Of Papers;

Cites Content

By MICHAEL M. GRYNBAUM

and EDMUND LEE

James Murdoch

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