Argentina's bondholders seek better repayment terms
May 19, 2020 |
Government is expected to review three counteroffers to forge a new proposal, but success is still uncertain as default looms
Argentina’s creditors made counteroffers to restructure $66 billion in foreign-law bonds as the clock winds down before the sovereign could fall into default this Friday. That prospect however did not deter some investors from snapping up Argentine debt, sending prices higher on Monday.
Three groups of bondholders made their offers last Friday, hours after Economy Minister Martín Guzmán said he was “positive” that a deal can be reached.
The proposals, however, are less severe than the government’s offer to swap 21 outstanding bonds for 10 new notes that mature in 2030, 2036 and 2047. Argentina’s proposal includes a three-year grace period on making any payments, a 5.4% cut in principal payments and a 62% reduction in interest payments, which all told would bring $41.5 billion in debt relief for the country, largely by slashing the interest rate on the bonds to an average of 2.33% from a current 7%.
In a videoconference before receiving the counteroffers, Guzmán said the most contentious part of the official proposal is the three-year grace period and he appears to be right. The three counteroffers coincided in seeking a grace period of only one year. They also concur that the sovereign should pay higher interest, at between 4% and 5.1%, according to copies of the counteroffers published by Ámbito Financiero, a financial newspaper in Buenos Aires.
All three of them provide cash flow relief and an extension of maturities, but the net present values of the counteroffers based on an exit yield of 10% run between $50 and nearly $70, according to Ámbito. That is better for the bondholders than the valuations of the government’s offer of between $39 and $44.
The Bondholders Group, backed by Gramercy Funds Management, Greylock Capital Management and Fintech Advisory, wants the the shortest bond to mature in 2040 and a haircut of 2.3% in the principal.
The Ad Hoc Bondholders Group, which includes Ashmore, BlackRock, Fidelity and T. Rowe Price, is proposing swapping the outstanding bonds for 12 new ones — six denominated in dollars, six in euros — with no haircut on the principal on eight of the new bonds and 1% on the four bonds maturing in 2036 and 2047. It also wants a shorter bond maturing in 2027.
The Exchange Bondholders Group, including BHK Capital and Monarch, is seeking to swap the outstanding bonds for only three new ones maturing in 2033 and 2040, and including a sweetener in the form GDP warrants, which would pay a bonus to creditors if the economy outperforms its forecasts.
Argentina's 4.625% 2028 bond rose 2.22 points in price to 38.87 while the 5.875% 2028 issue gained 0.58 points to 31.80, according to data provider Refinitiv. The ultra-long datad 2117 issue, with a 7.125% coupon gained 1.37 points in price to bid 30.75.
It is likely that Guzmán will use the counteroffers as a basis for making a new proposal, but whether it will be accepted or not by investors is uncertain.
On Friday, Guzmán said in an interview with Argentine news website Cenital that he was flexible, but not totally. “Success is not an agreement that mortgages the future of Argentina and leaves us hostage to a problem,” he said.
Goldman Sachs said in a note to clients on Monday that it believes the government’s apparent flexibility and the existence of the counteroffers mean that “a deal is within reach.”
Even so, the investment bank warned that there may not be enough time to reach an agreement by the end of the week, pushing the country into default, the ninth in its history.
“The lack of a unified proposal from bondholders indicates that there may still be non-negligible differences of opinion among creditors, which increases the complexity of the negotiations,” it said.
A default, Goldman Sachs added, could weaken the governments’ bargaining power, but it said the repercussions could be muted if the negotiations move forward and there is a perception that a deal can be reached.
Indeed, Walter Molano, chief economist at BCP Securities in Greenwich, Connecticut, said in a note to clients that "the real game changer" would be "an acceleration of the bonds," or when "bondholders demand that all obligations immediately be paid back in full,"as that could lead to cross-defaults.
The good thing for Argentina is that it would have an estimated 60 days for the acceleration clauses to be triggered in three global bonds if Argentina doesn’t make the $500 million payment by Friday, leeway to continue talks with bondholders to finally reach a solution.
"The important thing for the government is to get this nightmare behind them," Molano wrote. "Restructuring the debt will allow the [President Alberto] Fernández government … to eventually regain access to the international capital markets. Therefore, there seems to be light at the end of the tunnel. Fortunately, this time, the light is not of an oncoming freight train."