Fidelity Investments scored a victory over the province of Buenos Aires by compelling officials there to make good on a US$250 million payment they had threatened to withhold.
The Boston-based fund manager rejected the province’s demands for a three-month delay for the payment originally due in January, even as officials said there was no way the cash-strapped province could make good on its obligations. Fidelity’s outsize stake means it was effectively able to block the proposal, and in the end the province agreed to pay.
It was a surprise win for creditors and an embarrassing defeat for Buenos Aires Governor Axel Kicillof, who is reviled by investors for the antagonism he showed in debt negotiations years ago during his stint as the federal government’s economy minister. It also fueled speculation that investors will have the upper hand when it comes time to negotiate with the sovereign as it seeks to restructure billions of dollars of debt amid a severe recession and a plunge in the peso’s value.
“The message for bondholders is that they have enough leverage to negotiate,” said Joaquin Bagues, the head of strategy at Portfolio Personal Inversiones in Buenos Aires.
Buenos Aires, Argentina’s largest province, had sought creditors’ consent to push back payments on the note maturing in 2021, which would create time for negotiations to come up with a sustainable plan while avoiding a potentially chaotic default. But officials could only get holders of about 50 percent of the bonds to sign on to the deal, falling short of the 75 percent threshold they needed to change the terms without causing a default.
Fidelity is the largest investor in the bonds, holding more than 16 percent of the total outstanding as of the end of December, according to data compiled by Bloomberg. Kicillof called the stake a “blocking position” on Tuesday, lamenting Fidelity’s “enormous intransigence” during negotiations.
“We want to denounce and repudiate their attitude,” Kicillof said, seemingly showing some of the intemperance investors knew him for in years past. “That fund didn’t have the same constructive attitude, one of dialogue. It made its own offer, which was that it wanted to be paid everything but in installments. That wasn’t a viable solution for the province of Buenos Aires, or for the restructuring process for the nation.”
A spokesman for Fidelity, Adam Banker, declined to comment.
Buenos Aires province will use money from its coffers to make the principal payment, Kicillof said. The province will then start the process of restructuring its foreign-currency debt, alongside the national government’s efforts.
The move assuaged concerns that Buenos Aires will enter a tumultuous default that could lead to drawn-out litigation. Investors have been viewing Kicillof’s treatment of creditors as a first test as President Alberto Fernández formulates his own strategy for seeking debt relief from both private bondholders and the International Monetary Fund.
“The province always sought to find a constructive solution in good faith,” Kicillof told reporters.
The notes due 2021 edged lower, slipping 0.2 cent to 50.9 cents on the US dollar during midday trading in New York. They had traded as high as 69.5 cents in early January.
Sovereign bonds rallied on the news, with securities due in 2028 climbing 1.56 cent to 46.6 cents on the dollar.
Investors are encouraged by Kicillof’s about-face, seeing it as a sign the province and Economy Minister Martín Guzmán view a hard default as the least-desirable outcome and will instead want a negotiated settlement, according to Daniel Kerner, a managing director for Latin America at the Eurasia Group.
“The process could be messy, but ultimately it is clear that neither Guzman nor Fernández want a default,” Kerner wrote in a note. “If they have to sacrifice something, it will likely be debt relief, even if they push aggressively at first.”
The province sparked a plunge in its bonds when it asked holders last month to accept a delay in the payment, originally due January 26, to May 1. Buenos Aires had extended the deadline on its proposal four times and improved the terms of its offer ahead of the deadline. The grace period for the bond payment, after which it would have been in default, was set to expire February 5.
The province, home to about 40 percent of Argentina’s population, faces another US$700 million in principal payments in June, according a report published by Portfolio Personal Inversiones. The province has about US$3 billion in maturities due this year, Kicillof said.
by Scott Squires & Jorgelina do Rosario, Bloomberg