Moody's drops Argentina deeper into junk territory
April 6, 2020 | Daniel Bases
Negative outlook reflects risk that investor losses in restructuring may go beyond 65%
Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Fixed Income Funds Argentina Latin America
Moody's downgraded Argentina’s credit rating on Friday, cutting it to Ca from Caa2 in a move that reflects the firm’s expectation that private creditors will incur losses as a result of the government’s efforts to restructure its sovereign debt.
The three years of recession and economic malaise put Argentina on a path toward restructuring well before the compounding impact of the deadly novel coronavirus, COVID-19. The virus has caused a pandemic that has infected well over 1 million people in 181 countries, killing nearly 59,000 people as of Friday evening.
“Argentina's government has initiated the process of restructuring about $100 billion in market debt held by private investors as lack of market access has made it impossible to service its debt as currently scheduled,” the firm said in a statement.
Moody’s said the rating reflects the combination of measures such as extension to maturities, lowering of interest rates a cuts to principal amounts of debt held by private investors that will typically result in losses between 35% and 65%.
The negative outlook, Moody’s said, reflects the risk that losses could be beyond the 65% level.
President Alberto Fernández, has said he wants to restructure the foreign currency debt to give the economy time to recover from a recession, currently in its third year.
And his plans for a fast and friendly restructuring to be concluded by March 31 were stalled by the spread of the COVID-19 virus, which Moody’s warned will only compound Argentina’s “deep economic and budgetary challenges” and likely add funding stresses and losses likely to be incurred by bondholders. The estimated debt servicing of Argentine debt in 2020 is approximately $49 billion.
On April 1, the government said it would seek to restructure $83 billion in foreign currency debt with an offer to bondholders that would seek a grace period, an extension in maturities, a reduction in bond coupons and a potential haircut to the principal outstanding.
In February, the International Monetary Fund said Argentina’s servicing of its debt load was unsustainable. At that time the Argentine peso had depreciated by over 40 percent and sovereign spreads over benchmark US Treasuries blew out by 2700 basis points, net international reserves fell by half and real GDP contracted more than expected.
“As a result, gross public debt rose to nearly 90% of GDP at the end of 2019,” the IMF wrote in a staff technical note on public debt sustainability, published March 19.
By year-end 2019, Argentina’s total debt reached $323 billion, or equivalent to 88% of GDP, the IMF wrote. The multilateral lender is by far the single biggest creditor, at $44 billion, or 14 percent of the total.
Source: IMF - Staff Technical Note - March 19, 2020
Private creditors represent $133 billion, or 41 percent of the total. Debt governed by foreign law, within the private sector, was equal to about $73 billion. That figure is made up of two components: $28 billion issued prior to the historic 2016 debt restructuring that saw it pay out billions to holdout investors with debt from the 2002 default and $41 billion in debt issued after 2016. The balance of the private credit, $60 billion is governed by domestic law, however nearly half, or $24 billion is denominated in foreign currency.
According to the IMF, nonresidents are estimated to hold about 60% of all debt held by private creditors, equivalent to about $80 billion, including most of the foreign-law debt and about 30% of all domestic law debt. In order to service its debt, the IMF estimated gross financing needs of 13.3% of GDP, of which 6.1% of GDP is in foreign currency, beyond Argentina’s ability to generate financing sources.
The IMF said in a restructuring, Argentina's target gross financing needs cannot average more than 5% of GDP after 2024, and should not exceed 6% of GDP in any given year. In addition, debt service in foreign currency should average no more than 3% of GDP after 2024.
“In Moody's view, such a restructuring is likely to require substantial losses to investors,” the firm said in its statement.
Moody’s said it believes restructuring of foreign currency debt won’t be enough and it now expects some debt denominated in pesos, which is held by private creditors may also need to be restructured.