Argentina investors unfazed at restructuring extension

Argentina investors unfazed at restructuring extension

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

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(Updates with confirmation of default, fresh bond prices, adds Moody's comment)

Investors on Friday looked past Argentina’s missed payment on sovereign bonds and its decision on Thursday to further extend the expiration date of its offer to restructure $66 billion in foreign-law bonds, with prices of the eligible bonds little changed ahead of a three-day weekend in both Argentina and the United States. 

On Thursday night, the Economy Ministry said the negotiations will continue until June 2 “unless further extended or early terminated.” 

The sovereign, which launched the offer on April 21, was unable to rally enough bondholders to accept the proposal by a most recent deadline of May 22, leading Economy Minister Martín Guzmán to say ahead of the formal extension that bondholders would be given more time to come to a decision.

The extension “was totally expected because the timing was very hard to comply with,” Alberto Bernal, chief strategist at XP Securities, a US-based securities broker, told LatinFinance.

In morning New York trade, Argentina’s 5.875% 2028 bond was just positive with a minor gain of 0.09 points in price to bid 31.38. The 2038 3.75% Par bond was down 0.55 points in price to bid 35.20. The ultra-long bond maturing in 2117, carrying a 7.125% coupon was up 0.125 points in price to bid price of 29.50. All prices according to data provider Refinitiv. 

Argentina is analyzing “investors’ views and suggestions over different paths to improve recoveries … with a view to maximizing investor support while preserving its debt sustainability goals,” the Economy Ministry said in a statement. “Argentina firmly believes that a successful debt restructuring will contribute to stabilizing the current economic condition, alleviating the medium and long-term constraints on Argentina’s economy created by its current debt burden and returning the country’s economic trajectory to long term growth.” 

This is a change from the take-it-or-leave-it message the government had made previously, a sign that it is softening its approach to try to reach a deal. 

Argentina is offering to swap 21 outstanding bonds for 10 new notes that mature in 2030, 2036 and 2047. The 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%. 

Three groups of bondholders immediately rejected the offer, which equates to recovery values of between 30 and 40 cents on the dollar. On May 15, the groups presented counteroffers with estimated recovery values of 55-60 cents on the dollar, down from their original pretensions for 80-90 cents. 

At least one group, however, has since narrowed its recovery value to 50-55 cents, according to local and foreign press reports.

If the 5.875% 2028 bond is trading at 32, then getting 55 “is a pretty good upside,” Bernal said. 

ARGENTINA HAS THE BALL

Bernal cautioned, however, that the ball is now in Argentina’s court. “Argentina has two choices: take it or not. If you don’t take it, you go to hell. If you take it, you will make your life a lot more easier and will get some debt relief.” 

There is a catch, though. Argentina will officially go into hard default on a $500 million payment on three bonds in the offer after a 30-day grace period expires on Friday, the sovereign's ninth default on international bonds and the latest since 2014 and 2001/02. 

Bernal downplayed the potential default, saying it’s not really relevant unless investors activate an acceleration clause to demand immediate repayment on the bonds, exposing the sovereign to lawsuits and asset seizures abroad.

“Investors are not going to accelerate because they have the expectation that Argentina wants to do the right thing at this point in time,” he said. “If Argentina doesn’t do the right thing, that’s a different story.” 

Argentine President Alberto Fernández appears to understand “that going into default is really not going to make his life easier,” Bernal said. “And getting a deal done is not that hard because the investment community is pretty OK with giving Argentina some meaningful debt relief in the short term so that it can get through this pandemic.” 

The government shut down the economy on March 20 to try to contain the spread of the deadly novel coronavirus and is expected to keep the stay-at-home order in place beyond a latest end date of May 24, albeit with some additional loosening. The lockdown has slammed the economy, which is poised to shrink 7% this year, the worst since a 10.9% contraction in 2002, according to an April survey by the central bank published at the start of May. Before the pandemic, the economy was expected to shrink only 1%.

Bernal said that most of the bondholders are saying, “Yeah, you know what? These are special circumstances, let’s try to move forward” to reach a deal. 

DEFAULT CONFIRMED

On Thursday, Fernández sought to downplay the expected default on Friday, saying Argentina was already in default. However, he kept his stance that any deal with the creditors must be sustainable. “We are not going to subject Argentina to new commitments that we cannot fulfill,” he said in a televised press conference. 

In a letter on Friday, Argentina’s ambassador to the United States, Jorge Argüello, confirmed that the sovereign will not pay the $500 million. “In light of the prospect of reaching an agreement with its creditors on new terms for their bonds, Argentina will postpone this payment until an agreement is reached with creditors and the new terms are agreed upon on the interests to be paid on said bonds.”

Gabriel Torres, senior credit officer of Moody’s Investors Service, said the default could play against Argentina. 

"This default is consistent with Moody’s sovereign credit opinion which, as reflected in our current Ca rating, incorporates significant losses for investors,” he said. "Looking ahead, Moody’s anticipates that the outlook for Argentina’s debt restructuring will very likely become more complicated.”

The Ad Hoc Bondholder Group of creditors holding about $16.7 billion of Argentina's international bonds said that while this failure to pay is considered a default, it “understands that Argentina has expressed an intention to engage with creditors over the next week to try to find a comprehensive solution,” according to a statement. 

Even so, the group, which includes fund managers like BlackRock, Fidelity and T. Rowe Price, didn’t express outright optimism about reaching a deal.  

“The group welcomes Argentina’s expression of an intent to work with creditors, but actions speak louder than words,” it said. “Over the last month, Argentina has had virtually no substantive engagement with its creditors.”

The group called for Argentina to engage in discussions with creditors to find “a responsible solution to Argentina’s current financial difficulties consistent with their fiduciary responsibilities to the millions of people that have entrusted them to invest on their behalf.”

Guzmán appears to think otherwise. In a statement on Friday, he said the negotiations continue and are “positive, with increasing mutual understanding. There is still an important distance to cover, but, more importantly, all sides remain at the table to find a solution.” 

GROWING OPTIMISM

Others see this, too. “There is growing optimism that a deal is achievable within a reasonable time frame, which may discourage creditors from seeking immediate legal action if a default is confirmed,” Goldman Sachs said in a note to clients.

To reach a deal, Goldman Sachs said “a middle-ground solution” would be to reduce the three-year grace period so that bondholders can start receiving repayments by 2021, adding that it is optimistic that both sides will “reach an agreement within the next several weeks.”

Norberto Sosa, a director of IEB Invertir en Bolsa, a brokerage in Buenos Aires, said the gap for reaching a deal is 20.4 points, based on an exit yield of 10%, with the government seeking a haircut of 60% and bondholders asking for 40%.

"That means that each side would have to loosen 10% and be at 50%,” he told LatinFinance. "That is why the difference is not so great and there is optimism that an agreement can be reached."

IT’S NOT OVER UNTIL IT'S OVER

Others are less sanguine. Edward Glossop, an emerging markets economist at Capital Economics in London, said on Thursday that there is a risk that the restructuring talks could drag on until 2021, “and that recovery values on international bonds will be as low as 30 cents on the dollar.”

The default could give the bondholders more power to negotiate a better deal on the threat of acceleration, he added in a note.

Since the 1970s, the sovereign debt restructuring deals around the world that were resolved the quickest, at within a year, were “largely because governments either didn’t demand (or need) lots of debt relief,” Glossop said. “This doesn’t apply to Argentina.”

Argentina’s recession this year will cut tax receipts and boost public spending, leading to a widening of the budget deficit to nearly 10% of GDP this year from 4% in 2019, he said. This could lead to further currency depreciation, raising the public debt ratio from around 90% of GDP in 2019 to as high as 130%-140% of GDP this year, he added. 

“That would be consistent with recovery values of around 30 cents on the dollar, similar to 2001/02,” he said. “Given that bondholders appear to be shooting for 50-60 cents, this would require a big climb down. Even if the government caves into bondholders’ demands for higher recovery values, this would probably generate insufficient debt relief, raising the risk of another restructuring further down the line.”