Bondholders pan Argentina's restructuring offer, prepare for battle
The Argentina Creditor Committee says it “cannot support” the nation’s restructuring proposal and the government’s actions have “fallen well short of bondholders’ expectations,” as talks with officials step up.
The government's proposal for more than US$40 billion in debt relief got an early thumbs-down from investors, who said the terms were too easy for the serial defaulter.
The Argentina Creditor Committee “cannot support” the nation’s restructuring proposal and the government’s actions have “fallen well short of bondholders’ expectations,” the group said in a statement from its lawyers, who include Washington-based sovereign-debt specialist Thomas Laryea.
“Good-faith negotiations depend on the timely exchange of substantiated forward-looking economic and financial information and must be anchored in concrete and feasible economic policies,” the ACC, made up of mutual funds, family offices, insurance firms and asset managers holding Argentine debt, said. “Such information and policies have not been forthcoming.”
Argentina’s bonds still rose on Monday, with the price of its US$4.25 billion of notes maturing in January 2028 climbing 4 cents to 31 on the dollar as of 9.53am in London.
The plan to restructure US$66 billion of foreign bonds into notes with no payments until 2023 and a sharp cut in interest rates isn’t attractive enough to lure much participation, according to analysts from shops including SMBC Nikko, INTL FCStone Argentina, Portfolio Personal Inversiones and TPCG. The lack of a blueprint for boosting growth and taming the deficit undercuts confidence investors will ever be paid back, the strategists said.
The early criticism – while not surprising as bondholders position themselves for negotiations – signals the potentially difficult road ahead as Argentina seeks a deal with creditors, some of whom loaned billions of dollars to the country just a few years ago amid a promise of rebirth in South America’s second-largest economy.
Instead, the peso has lost more than half its value, inflation is running above 50 percent and gross domestic product is forecast to shrink for the third straight year in 2020.
A “broad set of bondholders” would probably “be prepared to make an equitable contribution through significant cash-flow relief during the period that is needed for economic policies, including structural measures, to take hold,” the ACC said. Argentina should “abandon the unilateral route and make time for a meaningful negotiation.”
Economy Minister Martin Guzmán, who took office in December with left-wing President Alberto Fernández, didn’t show signs of backing down in an interview with a local journalist published Sunday, insisting the nation needs massive debt relief to ensure social stability.
Under the proposal unveiled Friday, bondholders would exchange their securities for new ones with interest rates that start at zero and gradually increase, creating an average rate of 2.33 percent - well below what’s typical for emerging-market debt. The haircut on principal is relatively small at just US$3.6 billion, but the cut on interest obligations totals US$37.9 billion.
“The government thinks it’s nice that the deal they’re offering doesn’t have a harsh haircut, but investors don’t buy a bond just because it has a high number on a piece of paper,” said Roger Horn, senior strategist at SMBC Nikko Securities America in New York. “They buy bonds because they want a return.”
As part of the plan, no principal will be paid back before 2026, and just one-eighth of the bonds’ principal is due before 2030. That means the vast majority of the money won’t be repaid until the following decade.
There’s no doubt investors had already been bracing for a tough deal. Most bonds had been trading around 30 cents on the dollar in the run-up to April 16, when an abridged version of the proposal was unveiled. Some US$4.5 billion of international notes due in 2021 jumped the most since August on the next trading day, climbing 2.9 cents to 33 cents on the dollar.
The deal is also slightly better than the one offered by Argentina in a 2005 restructuring, where it imposed losses of over 70 percent.
The net present value of this year’s offer can’t be precisely calculated without knowing exit yields. Local broker Allaria Ledesma estimates an average NPV of 43 cents assuming an exit yield of 11 percent, while TPCG sees the average NPV at 32 cents with an exit yield of 12 percent and including the swap ratio.
Risk of Default
To win support from investors, the government could look at capitalising the interest that isn’t paid out during the grace period, according to Pablo Waldman, the head of strategy at INTL FCStone Argentina.
“The offer is better that expected, but it’s not very likely that the deal will be approved as it is,” Waldman said.
Argentina is no stranger to extended negotiations on sovereign debt after two defaults already this century, including a then-record $95 billion one in 2001. Its most recent default on foreign obligations, in 2014, came amid a drawn-out legal battle with creditors who held out of the 2001 restructuring, led by billionaire hedge-fund manager Paul Singer. Most of those claims were finally settled in 2016.
This time around, the government will face off with bondholders including BlackRock Inc., Pacific Investment Management Co., Ashmore Group Plc, Greylock Capital and Fintech Advisory Inc. Officials had been in preliminary talks with the creditors in the lead up to the offer.
“They propose what they always do: They want to collect more,” Guzmán said in the interview with local journalist Horacio Verbitsky. “They ask that Argentina makes more fiscal adjustments, that it continues on the path it had been following, and that led to disastrous results. That’s not something we’re going to do.”
Some analysts, like SMBC Nikko’s Horn, warn that ownership of Argentina’s debt has recently shifted to distressed funds that are more concerned with wringing every penny they can out of Argentina, even if that means a lengthy court fight.
The country has US$3.5 billion in payments on foreign-law bonds due the rest of 2020, according to Buenos Aires-based consulting firm 1816 Economia y Estrategia, including US$500 million of interest due on April 22.
“The risk of a hard default has risen dramatically,” Horn said.