Brazilian mailmen became unlikely victims of Argentina's defaultlast week after a $168 million fund used by their pension planrecorded a loss on most of its assets.

The fund operated by Bank of New York Mellon Corp.'s local unitwrote down its value by about 51 percent after losses on securitieslinked to Argentine government debt, according to a regulatory filingyesterday. While the statement didn't identify the entity that isthe fund's sole investor, all signs point to Postalis, the pensionmanager serving about 130,000 current and former postal workers inBrazil.

Postalis, which had 8 billion reais (US$3.5 billion) in assetsaccording to the latest data available, said in statements as earlyas 2011 and as recently as May that it had invested in the fund.Postalis's press office declined to comment.

Argentina last week failed to make a $539 million interestpayment on its bonds, prompting Standard & Poor's and FitchRatings to declare the country in default for the second time since2001. The country's bond prices have since retreated from athree-year high, and the International Swaps & DerivativesAssociation (ISDA) ruled that payouts must be made on a net $1billion of derivatives linked to the country'screditworthiness.

“Based on the ruling of ISDA on the default event, you could seemany more” investors declaring losses tied to Argentina, MarcoAurelio de Sa, the head of trading at Credit Agricole PrivateBanking in Miami, said in a telephone interview.

Postalis is Brazil's 14th-biggest pension group by investmentsunder management, according to June 2013 data available from theBrazilian pension association Abrapp.

The country's pension regulator declined to comment on thesituation.

The BNY Mellon fund, called the Brasil Sovereign II Fundo deInvestimento de Divida Externa FIDEX, said yesterday it wrote downnet assets by 197.9 million reais to 185.5 million reais by bookinga provision on credit-linked notes tied to Argentine bonds. Theloss also stemmed from a change in methods for valuing theinvestments, according to the filing.

Credit-linked notes, a type of structured security with anembedded derivative, promise investors a higher yield than they canget from conventional bonds in exchange for a higher risk of lossesunder specified credit events, such as a default.

A BNY Mellon press official in Sao Paulo declined to comment onwhether Postalis was the sole investor in the fund. Postalis wascreated in 1981 to guarantee retirement returns to its members,according to its website.

SEC Charges

Argentine government bonds due 2033 were little changed at83.645 cents on the dollar as of 9:15 a.m. in New York. BNY Mellon,which is also the trustee for the bonds, was barred fromtransferring an interest payment on the bonds by a U.S. court untilArgentina settles with creditors from its 2001 default who sued forfull repayment and won.

The Brazilian fund made the investment linked to Argentina'ssovereign debt in December 2011, when it was overseen by AtlanticaAdministracao de Recursos Ltda., according to the filing. BNYMellon took it over in March 2012.

In August of that year, the U.S. Securities and ExchangeCommission (SEC) charged Fabrizio Neves, Atlantica's then-owner,with fraud for overcharging customers $36 million by using hiddenfees on structured-notes transactions. Neves and the SEC agreed tosettle the dispute in February of this year, according to astatement from the U.S. regulator.

Neves didn't respond to a call to his home or emails seekingcomment.

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