Argentine bondholders reiterate rejection of government restructuring offer
May 5, 2020 |
Ad Hoc Group of Argentina Exchange Bondholders highlights legal ramifications of accepting the deal
Two weeks after the government of Argentina put out a proposal to restructure a part of its external debt, and just four days before the deadline, no agreement with bondholders seems in sight.
Three groups of investors, for now, appear to be maintaining a united front in their overwhelming rejection of Argentina’s restructuring offer.
In a joint statement issued early on Monday, the bondholder groups said they cannot accept the offer, reiterating that they are seeking constructive engagement to find a viable solution to Argentina’s financial challenges. They acknowledged that the government needs time to address the COVID-19 pandemic, but rejected economic projections being used to justify the government’s offer. The three groups range from large asset managers and mutual funds to distressed debt specialists to investors who own bonds that were the result of prior restructurings 10 and 15 years ago.
The offer highlights a three-year grace period on making any payments, a 5.4% cut to principal, and a 62% reduction in interest payments on $66 billion worth of external public debt. Even prior to the pandemic, Argentina was experiencing its third year of recession and facing questions of how to restructure its debt.
“Argentina’s proposal was too severe to start and the certainty with which the government is making this offer is reminiscent of past behavior,” said one bondholder, who wouldn’t commit to saying there was much of a chance, at present, for both sides to come off their initial positions.
Argentina’s government, under Alberto Fernández, has also pushed into the public sphere to make its argument. Economy Minister Martín Guzmán wrote an opinion piece for the Financial Times over the weekend saying the country cannot pay any more. Through a public relations firm it released a fact sheet on Monday spelling out its case, and included supportive quotes from Pope Francis as well as notable left-leaning economists, such as Guzmán’s mentor, the Nobel Prize winning economist and Columbia University professor, Joseph Stiglitz.
The government said its proposal is “consistent” with levels of debt relief outlined by the International Monetary Fund. The IMF lent Argentina $57 billion in 2018 under the prior administration of Mauricio Macri.
The bondholder statement reads, in part that they “...cannot support Argentina’s recently launched exchange offer, and will not tender their bonds in such offer, because, among other reasons, they consider the terms to require Argentine bondholders to bear disproportionate losses that are neither justified nor necessary.”
In mid-April, Argentina’s proposal was aimed at allowing the Argentinian economy to stabilize and an offer to commence interest payments in 2023. Then, on April 21, economy minister Martín Guzmán said that Argentina would not make a payment of $500 million on three foreign-law bonds due April 22, as the country sought to restructure the debt over the next few weeks.
Argentina has not yet missed a payment on its foreign law bonds, but the 30-day grace period for paying creditors on those bonds is running out on May 22.
From the moment the proposal was first announced in mid-April, three groups of creditors said they did not agree with the proposal. This was the start of the negotiations.
And as the date approaches, efforts are being made by bondholder groups to mobilize undecided investors against agreeing to the proposal.
Following the statement, one group of investors, referring to themselves as the Ad Hoc Group of Argentina Exchange Bondholders, laid out their rejection case in a webinar for investors. They explicitly said they were not soliciting for business, but rather offering their analysis of why the government’s deal was not acceptable to them. This group says it represents about $4 billion in principal, or 15% of bonds that were issued in prior debt exchanges in 2005 and 2010.
“Argentina has refused to engage with bondholders and shown to follow the unilateral path once again,” Thomas Moatti of Pharo Management LLP, a member of the group’s steering committee, said during the webinar. He added that Argentina’s offer leaves bondholders in a position of inferior protection and does not guarantee a fair recovery rate for everyone.
A weaker pari passu, or equal treatment clause, a shorter prescription period, lower ability for the holders to bring suit and higher sovereign immunity, were underlined as evidence of lower bondholder protection in the webinar.
“In exchange for your existing bonds, you will get new bonds with materially worse economic and legal terms,” Dennis Hranitzky, a lawyer with Quinn Emanuel Urquhart & Sullivan, and veteran of prior Argentine sovereign restructurings, said in the presentation.
“And if the level of support for the offer is high enough you could also end up forcing bondholders who don’t like this deal to taking it anyway against their will. If you do not consent, in all likelihood you will keep your existing bonds with their better economic terms and all of their creditor protections,” he said.
The proposed exchange offer has other shortfalls, according to the presenters, who said that it targets to repay only about $350 million in cashflows by the end of 2023, that it is confiscating of investors’ currently-accrued interest claims, that it offers no contingent instrument, and that it assumes disproportionate savings for Argentina, while offering no adequate additional compensation for bondholders.
Argentina’s sovereign debt has slumped in value from already depressed prices. The 2038 Par Bond, part of the exchange bondholders’ portfolio, traded down 3.87 points in price to 26.62, according to data provider Refinitiv.
“Everyone knows that Argentina is facing a really horrific economic crisis and bond holders are willing to give some relief. But not giving them anything. Not coming up with something to give them, in these negotiations, makes them not negotiations at all,” said Roger Horn, senior emerging markets strategist at SMBC Nikko Securities America in New York.
“What I liked about today’s presentation is that they tried to move beyond the economic argument and to find a legal argument that might stick with investors. The legal argument of giving up your rights and not getting anything in return for it,” he said.