La Rioja skirts default, gets off ratings watch

La Rioja skirts default, gets off ratings watch

Asset Management Bonds Debt Capital Markets Corporate & Sovereign Strategy Debenture Economy & Policy Fixed Income Argentina Latin America

La Rioja, a small province in western Argentina known for lunar landscapes and olives, made a $14.7 million payment on a dollar-denominated bond due in 2025, managing to avoid a formal default by paying the money past the deadline but inside a grace period.

The province made the payment on March 20 within the 30 days allowed in the terms and conditions of the notes, leading S&P Global Ratings to remove the province from its credit watch with negative implications. 

However, the agency warned that La Rioja is not out of the woods, saying the probability of default in the next six months is “at least one in three.” 

The province’s financial problems stem from the country’s economic and financial crisis, which started in April 2018. A more than 240% depreciation of the peso over the past two years has pushed up the cost of servicing dollar bonds in peso terms, while an economic recession in its third year is reducing tax revenue. At the same time, inflation of more than 50% is pushing up expenditures at a faster clip, making it hard to service the debts. 

La Rioja raised $300 million with the sale of the 2025 bond in two issues, in 2017 and 2018, using the proceeds to finance public works and the construction of a wind power plant. It was the province’s first green bond.

“We expect the province’s budget performance and liquidity to remain fragile given Argentina’s prolonged recession, compounded by recent and significant external shocks,” S&P said. “We view national government support and access to debt markets as highly unlikely as Argentina discusses its own debt management strategy with bondholders, bankers, and the International Monetary Fund [IMF].” 

Early this month, Jorge Capitanich  the governor of Chaco province, said that the country’s provinces will likely have to wait until the sovereign concludes a restructuring of its more than $100 billion debt with private creditors and the IMF before they can do the same. 

“No province can really get round the sovereign’s negotiations,” he told LatinFinance

While Argentina is seeking to complete its restructuring of $68.8 billion in foreign currency bonds by March 31  this likely will be delayed as the spread of the coronavirus makes it hard for creditors to study an offer, which is set to be made in the next few days. 

La Rioja depends on tax transfers from the federal government for more than 85% of its operational income, and the economic fallout of the health crisis likely will force it “to prioritize social spending over the timely payment of debt service,” S&P said.