Argentina says debt restructuring talks 'positive'

Argentina says debt restructuring talks 'positive'

Asset Management Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Fixed Income Funds Coronavirus Politics Argentina US

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Argentine Economy Minister Martín Guzmán said on Friday that negotiations with investors to restructure $66 billion in foreign-law bonds have been encouraging, saying he wants to reach a deal as soon as possible as a deadline for default looms on May 22.

"There has been positive dialogue and we will continue working [with the bondholders,]" Guzmán said in a videoconference. "We need to have a collaborative process with all sides acting responsibly."

Argentina failed to get enough acceptance for its offer by the most recent deadline on May 8, leading it to extend the deadline until May 22, the same day the grace period expires for making a $500 million payment on three bonds in the restructuring offer. If it does not pay, Argentina will enter into hard default, the ninth in its history.

"For us, success means achieving a deal that works for putting Argentina back on its feet," Guzmán said in the videoconference hosted by the US Council on Foreign Relations. Such a deal, he said, must be "sustainable, a deal that we can commit to and that we can fulfill and that we will fulfill."

Most of the bondholders rejected the original offer, which called for a three-year grace period on making any payments to give the country time to pull out of a recession that is now in its third year. The offer also included a 5.4% cut in principal payments and a 62% reduction in interest payments. All told, the offer would provide the country with $41.5 billion in debt relief, largely by reducing the interest rate on the bonds to an average of 2.33% from a current 7%.

Investors generally bid up the prices on the sovereign bonds. The 4.625% 2023 issue was up 2.8 points in price to a bid price of 36.6, according to data provider Refinitiv. 

Guzmán insisted that Argentina cannot pay more that what it offered, even less so now that the economy is taking a hit from the coronavirus pandemic. He has estimated that the economy could fall by 6.5% this year, the worst since a nearly 11% decline in 2002.

While bondholders have said the proposal can be improved, only one counteroffer had been made as of when Guzmán spoke on Friday. The minister said it was turned down for not being sustainable, adding that the most criticized aspect of the offer has been the three-year grace period.

A few hours after he spoke, the ministry announced in a statement that three counteroffers had been made by creditors, which it said would be analyzed.

On Sunday, the Ad Hoc Group of Argentina Exchange Bondholders released a statement saying they submitted a "comprehensive counterproposal" to all bonds issued by Argentina under its 2005 indenture. They said the proposal respects the principles shared previously with Argentina while also taking into account Argentina's current economic conditions. This group, they said, is comprised of 18 investment institutions that collectively hold over 15% of the outstanding Exchange Bonds issued by Argentina under its 2005 and 2010 debt exchange. They say that is equivalent to nearly $4 billion in bonds issued by Argentina at those times in which bondholders voluntarily accepted large reductions in net present value to help Argentina recover from the massive default in late 2001 and early 2002.

In their statement, they said they offered terms, while not outlining them specifically, which offer Argentina "substantial cash-flow relief" through a combination of interest-payment holiday, decreased coupon payments and deferral of amortization payments. 

They said, in a show of unity with other foreign bondholders, that their proposal was coordinated with counterproposals offered concurrently by other groups such as the Argentina Creditor Committee, Gramercy Investment Management, and Fintech Advisory Inc. "for the restructuring of Argentina's Global bonds issued under its 2016 indenture." 

"The coordinated counterproposals represent a good faith effort by these groups to provide a coherent basis for an overall expeditious restructuring of the entirety of Argentina's foreign law bonds and a long-term sustainable debt profile," the Ad Hoc group's statement said.

COVID-19 SPENDING

The surge in public spending to deal with the COVID-19 pandemic has led to a widening fiscal deficit and made it harder for the government to consider shortening the grace period. Even so, Guzmán said the government would entertain any counteroffer as long as it allows Argentina to restore debt sustainability.

"We made an offer and if there are different ideas, we are always willing to listen," Guzmán said. "It would be of big help right in this process if creditors put on the table alternative ideas."

While the risk of default looms, Guzmán suggested that the government will work on reaching a deal even after deadline day.

"We will continue working on the debt front until we achieve that result," he said of putting the country back into a position where it can pay its debts over time.

He said the government issue GDP warrants, which would pay a bonus to creditors if the economy outperforms its forecasts, but he added that so far bondholders have turned down such value recovery instruments.

"If there are alternative ideas that are consistent with the constraints that we face, we will consider them. We are waiting to listen," he said.

DEFAULT IS IN THE CARDS

Before the minister's presentation, Mauro Mazza, head of research at Bull Market Brokers in Buenos Aires, said he expects Argentina to default on May 22, possibly with a standby agreement with bondholders.

The agreement give the country another 60 days until July 22 to come up with a solution before bondholders can demand an acceleration of payments, forcing the country to come up with a restructuring proposal on all of its dollar-denominated debts and expose it to embargoes on assets held abroad.

"After July 22, it is a total default," Mazza said. "Argentina will enter into default when it no longer has any more instruments to impede it."