Argentina, creditors detail new proposals

Argentina, creditors detail new proposals

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

Argentina improved a proposal for restructuring $66 billion in foreign-law bonds by adding a sweetener, increasing the interest rates on the new bonds, shortening some maturities and trimming the grace period for starting payments, but warned that challenges still stand in the way for reaching a deal. 

The Economy Ministry said in a statement on Thursday night that the offer to swap 21 outstanding bonds for 10 new notes has been modified. 

Prices for Argentina's sovereign bonds were generally stronger on Friday, following news of both the government's new restructuring proposal as well as news that some creditors announced they are now submitting an even better offer than what the government just unveiled.

In the government's proposal, the grace period, considered one of the largest setbacks for reaching a deal with creditors, has been shortened to two years from three, while a year has been shaved off a year of the maturity on some of the bonds. Instead of maturing in 2030, 2036, 2043 and 2047 as originally proposed, the new dollar- and euro-denominated bonds will mature in 2030, 2035, 2042 and 2046, the ministry said. 

More of the bonds will also pay higher interest rates, stepping up to as much as 4.875%. The original offer had included a 2043 bond stepping up to 4.875% only. The new offer has been modified so that the 2035, 2038, 2042 and 2046 bonds denominated in dollars all reach that interest rate in their last few years. The euro-denominated bonds also step up to higher interest rates than in the original offer, reaching as high as 3.75%.

The increase in the interest rate likely will reduce the haircut on interest payments for creditors, which in the original offer was 62%. That along with a 5.4% cut in principal payments was to have provided the country with $41.5 million in debt relief.

The ministry did not specify the debt relief in the revised proposal, which also includes a sweetener in the form of an accrued bond that is denominated in dollars and matures in 2034. The accrued bond will pay 1% interest starting in 2022, the ministry said, adding that it is also willing to discuss value recovery mechanisms, such as GDP warrants. 

The deadline for accepting the offer is June 2, a target that still appears tight. 

Bondholders react
Two of the three groups of creditors — the Ad Hoc Argentine Bondholder Group and the Exchange Bondholder Group — said on Friday they submitted what they called an improved proposal on the terms of a debt restructuring to the government.

“We are confident our new joint proposal provides the basis for a collaborative solution that will both serve the interest of the Argentine people and help to restore the trust of the international financial community,” the Ad Hoc Argentine Bondholder Group said in a press release.

The joint proposal would provide “ample fiscal space” for the government to deal with the economic and social challenges stemming from the COVID-19 pandemic, “while at the same time preserving value for international bondholders,” the group said.

Their offer calls for providing $23.8 billion in cash flow relief through 2023 through a combination of reducing the average coupon rate on the bonds to 4.25% and extending maturities to an average of 13.3 years with no amortization payments until 2025. In total, the offer would provide Argentina with more than $36 billion in cash flow relief over a nine-year period. 

The offer by the groups, which hold a little more than 30% of the existing bonds in the proposal, is higher than the government’s original offer to cut the average interest rate to 2.33% from 7%.

Argentine bonds were generally strong from the start on Friday, but saw steady improvement as word spread of sweetened terms. By the close of trade on Friday, the 5.875% 2028 issue was up 1.31 points in price to bid 34.07. The bid price has risen from a bottom of 22.77 in late March and in the last month has risen steadily as talks with creditors have developed.

Distance to cover
On Thursday night, Economy Minister Martín Guzmán said talks with one group of creditors didn’t lead to an agreement by the expiration date on a confidentiality agreement. 

“We have come closer, but there is still an important way to go,” he said.

“The so-called Ad Hoc group of creditors moved in the right direction with respect to its previous offer, but it was insufficient for the country's needs,” he added. “We hope to continue working with the creditors of this group.”

The minister did not provide specific reasons for the rejection.

Three groups of bondholders rejected the original offer, which was made on April 21. The original offer equated to recovery values of between 30 and 40 cents on the dollar, far less than the 80-90 cents the creditors wanted. On May 15, however, the groups presented counteroffers with estimated recovery values of 55-60 cents on the dollar, and one group subsequently narrowed that to 50-55 cents.

Guzmán said he is still in talks with creditors on another proposal, and expressed some optimism. 

“There are other creditors with whom we have pursued a path that brings us closer, but it is still early to talk about it when we are still under confidentiality agreements,” he said.

A big challenge, he said, is to reach an agreement with all of the creditors, not just one group. 

Indeed, any deal must be accepted about an average of 75% of the creditors for it to be successful, as in the supermajority obliging all holdouts to accept the terms.

Another challenge is “to reconcile the positions of the different creditors, which are very diverse, since they all hold different instruments, and therefore have different preferences and visions,” Guzmán said. “As in any restructuring, coordination among creditors is always a central issue.”