Buenos Aires province hints at extending bond talks
May 8, 2020 | Charles Newbery
Gov. Kicillof is seen as taking a more moderate approach with bondholders, but success depends on the federal government's restructuring
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Buenos Aires Gov. Axel Kicillof hinted late Wednesday that the province could extend restructuring talks with bondholders, but said he prefers to reach "a good-faith and joint solution" by the deadline.
"The good thing would be to reach an agreement that is convenient for both parties by Monday," Kicillof said on La Red radio.
"There is a margin [for an extension], but we do not want to do it, we want to end the process," he said.
Bondholders have until Monday to accept an offer from Buenos Aires to restructure $7.15 billion in bonds, the same day a grace period ends for the province to make a $110 million bond payment or go into default. But a group of investors with more than 40% of the province's external debt has twice rejected the proposal, calling it "effectively an unilateral offer."
Kicillof, however, held the line on the province's restructuring proposal.
"The interest of the bondholders is to obtain more, but we cannot do more. I understand that ours is a good proposal," he said.
In its proposal, the province offers to swap 11 outstanding bonds for new notes with longer maturities. It also asks for a three-year grace period, a roughly 55% cut in interest payments and a 7% discount on principal payments. The offer includes two interest-only bonds as a sweetener.
The bondholders, in return, had offered to extend maturities by three years and provide $3.3 billion in cash flow relief, but the province rejected the proposal on grounds that it did not give enough debt relief to get back on track with bond payments.
Given the impact of the COVID-19 pandemic on global markets, Kicillof said, the province's proposal is that much "more attractive" for bondholders. "The world is declining in gross domestic product, trade, stocks, currencies and commodities," he said.
Change in tactics
With the deadline approaching, Kicillof’s suggestion that the province could extend the talks is a sign he is being more conciliatory than bondholders had perhaps thought.
Kicillof has played hardball in the past. As the national economy minister from 2013 to 2015, he stood up to international hedge funds in talks to restructure defaulted bonds. He did not win, but he emerged with a reputation for playing tough. That was evident again earlier this year. When the province did not get enough bondholder acceptance for a four-month deferment on $250 million bond payment, he waited until the very last minute to make the payment.
He has since had to soften his stance due to challenges he faces on multiple fronts as governor, said Juan Cruz Díaz, a director of Cefeidas Group, an international advisory firm in Buenos Aires.
Not only is Kicillof overseeing the debt negotiations, but he is running an "always difficult" province during the COVID-19 pandemic, Díaz said.
While the governor has been working closely with the federal government and the city of Buenos Aires on the pandemic response, protests have cropped up in the densely populated poor districts around the capital, where people have demanded an end to the COVID-19 shutdown so they can go back to work.
At the same time, Kicillof has been under pressure to release of inmates from prisons to serve time at home, where it is thought they are at less risk of catching the coronavirus. A number of the prisoners have gone on to commit crimes, sparking at least one pots-and-pans protest.
"Faced with this context, it's evident that he has reduced his level of confrontation when it is necessary," Díaz said. "We are seeing a Kicillof who has a lot of complicated responsibilities and is facing harder times ahead. A default would create a lot of complications for financing in the future."
The change in tactics has caught bondholders by surprise, who are now dealing with "a Kicillof who is going to be moderate when he needs to be," he said.
Fate tied to sovereign
No matter what happens in the province's debt talks, their success ultimately depends on the federal government restructuring $66 billion in bonds by a self-imposed deadline of May 8 or by May 22, when a 30-day grace period ends for it to make a $500 million payment on three bonds or enter into default.
"If Argentina defaults, no matter what agreement the province comes to, it will not be sustainable," said José Ignacio Bano, head of research at InvertirOnline.com, a brokerage firm in Buenos Aires.
To be sure, Bano said he does not expect the province's creditors to accept an offer before the federal government restructures its own debt because a sovereign default will affect the province’s tax revenue and repayment capacity. And if they did come to an agreement before an eventual sovereign default, it would have to be renegotiated, he said.
"An Argentina in default and an Argentina with access to the international markets are two different worlds," Bano said.