Argentina postpones payment on local bonds
April 7, 2020 |
Government gains time to restructure $83 bln in external debt, sources say
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Argentina said Monday that it postponed payments on $9.8 billion in local-law, dollar-denominated bonds until December 31 at the latest, a move seen as gaining time to restructure $83 billion foreign-law bonds.
The government said in a decree that it took the step because the economy and public finances have deteriorated as a result of the spread of the coronavirus.
"This decision constitutes a step that was contemplated in the process of restoring the sustainability of public debt," Economy Minister Martín Guzmán told the state news service Télam. "We are aiming for an equitable treatment for public debt in dollars under Argentine law and foreign law."
The government plans to ask holders of the $83 billion in foreign-law bonds for a grace period, an extension in maturities, a reduction in coupons and a potential haircut, a strategy that is designed to allow the economy time to recover from a recession in its third year so that payments can be resumed on time.
The target had been to wrap up the restructuring by March 31, but that was stalled by the coronavirus outbreak, which has surged from one confirmed case of COVID-19 at the start of March to 1,554 cases and 48 deaths on April 6, according to according to the Johns Hopkins Coronavirus Resource Center.
"The first priority is health," President Alberto Fernández said Sunday in a video interview on the El Cohete a la Luna website. He said the debt restructuring has been pushed back to second or third on the agenda.
To slow the spread of the coronavirus, his administration has locked down much of the economy from March 20 to April 13, a strategy that is helping, but only so much, Health Minister Ginés González García said.
"We are doing less badly than other countries because, in reality, we are all doing badly because the pandemic exists," he said on television late Sunday, adding that the number of cases "is rising a little." González García has forecast that the number will peak at the end of April or by mid-May, before reaching 250,000 by the end of the year.
A drawback of the shutdown is that the country's economic prospects have worsened. Goldman Sachs estimates the economy will shrink 5.4% this year, far worse than its previous estimate of a 1% contraction.
Esteban Fernández Medrano, an economist at MacroVision Consulting and GlobalSource Partners in Buenos Aires, said that as the health crisis affects the economy and public finances, Argentina will have less room to maneuver in the talks with holders of foreign-law bonds.
"It is playing all of its cards," he said of the government's decision to defer payment on the local-law bonds.
He added that the message to foreign-law bondholders is that Guzmán would prefer to default over entering into an unsustainable debt restructuring deal. "This increases the chance of a default," he said.
Still, Fernández Medrano said he does not think the deferment was done to send a message to the markets. Instead, it is designed to form a "cushion" in the event that the pandemic lasts longer or costs more than expected.
"The government needs to save all the assets it can and all of its payment capacity to deal with this crisis," such as by providing financial assistance to unemployed workers, he said. "The government is preparing for a long fight."
Sebastián Maril, a director at Research for Traders, a financial consultancy in Buenos Aires, said the market had expected the postponement, given that the government faces more payments in local-law dollar bonds than in foreign-law bonds.
On the positive side, he said the Fernández administration now will have more funds available to keep on top of foreign-law bond payments. "This will give the government time to negotiate the debt restructuring," he said.
The postponement affects many of the bondholders who also have foreign-law bonds, however, and it could "put them in a bad mood," he said. "They may be less willing now to negotiate in good terms and conditions."
Mauro Mazza, a research analyst at Bull Market Brokers in Buenos Aires,said the delay meant the government would put a priority on restructuring its external debt.
"That's it," he said, "these guys are going to prioritize me. Argentina made a gesture."
Prices rose for Argentina's dollar-denominated bonds in the secondary market on Tuesday with the 4.625% 2023 notes up a point to bid 31.50 and the 5.875% 2028 bonds up 1.36 points to bid 27.23. The ultra-long 7.125% 2117 bonds, meanwhile, rose 1.875 points to bid 27.87, according to data provider Refinitiv.