Buenos Aires Province’s plan to seek talks with creditors ahead of a debt payment due this month has torpedoed one of the world’s best bond rallies.
The province’s US$500-million of notes due in January 2021 tumbled 5.3 cents Wednesday to 64 cents on the US dollar, their worst day in more than four months.
The securities had returned 54 percent from the end of August through Tuesday, putting them among the top performers in emerging markets.
The bonds reversed course after provincial officials announced late Tuesday that the economic crisis enveloping the country had compelled them to seek restructuring talks with creditors. While a default of some sort had been expected since the peso plunged in the aftermath of an August election that indicated a left-wing government was likely to take over from then-president Mauricio Macri, investors had bid up the debt in the past few months on bets the US$250-million payment due January 26 would still come through.
“Part of the rally was following the rest of Argentina’s bonds. But another part, the largest gains, was due to the expectation that investors would collect the bond’s amortization on Januaryt 26,” said Ezequiel Zambaglione, head of strategy at Buenos Aires-based brokerage Balanz Capital.
The bond pays 33 percent of the principal this month, Zambaglione added.
The province’s Finance Ministry said it requires “temporary financial relief” and would seek to reach a solution with creditors that will allow it to fulfill “all of its commitments” including to health, education and other social spending. A group of bondholders, led by Greylock Capital Management, had already formed in anticipation of restructuring talks, but some investors had been betting the federal government would cover the January payment to avoid a hard default while negotiations were ongoing.
To be sure, the rally that turned the bonds into some of the world’s best performers came after an even bigger sell-off in August, and investors who’ve held the securities for a year have seen losses exceeding 20 percent over that period. The price hasn’t toppedd 70 cents since the initial collapse, but for those who bought at the trough, the returns were substantial.
The notes could be the first gauge of President Alberto Fernández’s debt plan since he took office in December, warning creditors that the country needed relief while promising to seek a quick and fair restructuring. The country already unilaterally pushed back maturities on around US$9.1 million of dollar-denominated Treasury bills known as Letes in December, the second such delay in payments in the past five months.
Other Argentine securities had also been on a fairly steady march higher since the sell-off that came in the immediate aftermath of the August vote. Sovereign notes due in 2033 have surged 56 percent; bonds from the state-controlled oil company YPF due in 2024 are up 43 percent; and Córdoba Province notes due 2024 have returned 50 percent since August 30.
“After Macri’s election setback in August, traders were pricing in the end of the world,” said Jan Dehn, head of research at Ashmore Group Plc in London. “Sometime later, they realized the world wasn’t over and that they had overreacted.”
While those bonds have seen significant gains, they still trade at “significantly dislocated levels,” Dehn added. “I suspect investors will see a lot of volatility in the bonds.”
Buenos Aires Province Economy Minister Pablo López held a call with bondholders on Wednesday, according to people familiar with the talks. The province took note of the points discussed and will continue working on the matter over coming days, said its press office.
“Doubts persist over whether the province will negotiate that payment within a broader restructuring, or not,” said Alejo Costa, chief strategist at BTG Pactual in Buenos Aires. “Bringing together the 2021 bondholders suggests they are going to try to rollover the payment or negotiate it within a more general agreement.”