Fitch puts Argentina in restricted default

Fitch puts Argentina in restricted default

Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Fixed Income Funds Argentina Latin America

Fitch Ratings on Monday cut Argentina’s foreign currency sovereign credit rating to restricted default after the government announced a plan to postpone payments on $9.8 billion worth of local-law, US dollar-denominated bonds until December 31, 2020, at the latest.

The credit rating firm said the decision made on April 5 constituted a distressed debt exchange and by its criteria the third largest economy in Latin America was considered in default on its sovereign obligations.

“Fitch has deemed the maturity extension to be a DDE in line with its published Sovereign Rating Criteria, albeit unilaterally via presidential decree rather than a negotiation with creditors, given that it entails a material reduction in terms and was taken to avoid a traditional payment default,” it said in a statement.

Long-term US dollar-denominated Bonar debt as well as short-term US dollar-denominated Letes debt that had been previously rescheduled for August 31 were affected by the government’s decision, Fitch said.

Last week, Argentina said it would seek to restructure $83 billion in foreign currency debt with an offer to bondholders that will seek a grace period, an extension in maturities, a reduction in coupons and a potential haircut.

“The authorities have released new projections indicating Argentina's sovereign debt is unsustainable, requiring substantial relief from commercial creditors. A formal exchange offer has not yet been submitted, and how much of a loss creditors would be willing to accept remains highly uncertain, and if the super majorities needed to reach collective action clauses can be achieved,” Fitch said.

The firm warned of a potentially long road ahead with drawn out negotiations and outright payment defaults “given that the authorities have expressed a narrowing appetite to keep servicing bond interest with international reserves,” Fitch said.

While Fitch cut its rating on the foreign currency denominated bonds, there was a rally in some of the US dollar denominated bonds governed by foreign law on Monday. Investors bid up the debt on the belief that the decision to postpone paying the local law bonds meant the government might be trying to buy time to restructure the foreign law debt.

Investors responded by bidding up US dollar-denominated bonds with tenors both long and short. The 4.625% January 2023 issue traded up 1 point in price to bid 31.50. The 5.875% January 2028 bond rose 1.36 points to bid 27.23, while the ultra-long dated 2117 issue, with a 7.125% coupon, rose 1.875 points to bid 27.87, according to data provider Refinitiv.