Argentina reaches restructuring deal with creditors
August 4, 2020 |
Government hashes out a last-minute agreement with three creditor groups and other bondholders; inflation a concern
Argentina said on Tuesday that it has reached an agreement for restructuring $66 billion in foreign-law bonds with three creditor groups and other large bondholders that had been holding out on a deal, paving the way for the country to rebuild the economy and eventually return to borrowing on international credit markets.
“We resolved an impossible debt in the greatest economic crisis on record and in the midst of a pandemic,” Argentine President Alberto Fernández said in an interview on Centinal, a news website in Buenos Aires. “We finally closed an agreement that allows Argentina to save $33 billion on the debt over the next 10 years. Now we have cleared the horizon to where we want to go” and to put “the country on its feet.”
In a statement earlier in the day, the government said the agreement was reached with three groups — the Ad Hoc Group of Argentine Bondholders, the Argentina Creditor Committee and the Exchange Bondholder Group — as well as "other significant holders" of the bonds after more than three months of negotiations. The deadline for the invitation, which was launched April 21, had been extended several times to a latest end date of Tuesday.
The agreement "will allow members of the creditor groups and such other holders to support Argentina’s debt restructuring proposal and grant Argentina significant debt relief," it said.
The three creditor groups, made up of some of the world’s biggest investment funds like BlackRock and T. Rowe Price, had been demanding better terms. The government had refused to cede as of last week, saying its offer, which had been improved several times, was final.
Still, the government made further changes, saying that it has now agreed to adjust the payment dates for the new bonds to be issued as part of the restructuring, but "without increasing the aggregate amount of principal payments or interest payments that Argentina commits to make while enhancing the value of the proposal for the creditor community."
In other amendments, the payment dates on the new bonds were changed to January 9 and July 9 from March 4 and September 4, and the new accrued interest bonds to be issued as a sweetener will begin amortizing in January 2025 and mature in July 2029. The new dollar- and euro-denominated 2030 bonds will begin amortizing in July 2024 and mature in July 2030, "with the first installment being in an amount equivalent to one half of each remaining installment," the government said. And the new dollar- and euro-denominated 2038 bonds to be issued in exchange for existing discount bonds will begin amortizing in July 2027 and mature in January 2038.
The government also said that the issuance caps on the new dollar-denominated bonds will be increased to reflect the difference in the exchange rates between the original invitation and the revised invitation.
On the legal front, the government added that it will revise "certain aspects" of the collective action clauses in the new bonds in line with proposals from creditors "that seek to strengthen the effectiveness of the contractual framework as a basis for the resolution of sovereign debt restructurings."
The bondholders now have until August 24 to accept the invitation, meaning that it will release the results on August 28 and issue the new notes on September 4, the government added.
"We are pleased to have reached an agreement in principle with Argentina for a proposal that will provide the country with the necessary economic relief and sustainable path it needs in the wake of COVID-19, as well as renewed access to the international capital markets for Argentine issuers to help encourage future, long-term investment in the country," the three creditor groups said in a joint statement on Tuesday. "The agreement is a good outcome for all participants and delivers an offer that all creditors should support."
REBUILDING AN ECONOMY IN TATTERS
The deal comes as the economy falls deeper into recession, with most economists saying it will shrink by more than 12% this year as a lockdown for COVID-19 drags on without slowing the spread of the new coronavirus. The government shut down the economy on March 20 and has extended it to August 16.
With the deal, the government can now focus on restructuring other debts. In an interview last Thursday with the Atlantic Council, a Washington, D.C.-based think tank, Economy Minister Martín Guzmán said he would seek next to negotiate longer repayment terms for $44 billion in debts owed to the International Monetary Fund and some $2.1 billion to the Paris Club of wealth nations.
The deal drew praise from economists in Argentina on Twitter, including the opposition. Alfonso Prat-Gay, a former treasury minister, said that while the deal could have been better and achieved faster, and with more interest relief, longer terms and a greater haircut on the capital, it is good enough to have a deal. "Without a deal, there’s no start" in a recovery of the economy, he wrote.
Gramercy Funds Management, which had already agreed to the restructuring, described the latest agreement as a "breakthrough."
"This agreement will allow the country to sustain high growth, reduce poverty, and enable more Argentines to meet their legitimate aspirations for a better standard of living for their families — all of which are also essential for improving creditworthiness and breaking the cycle of boom-bust external financing," Gramercy founder and CIO Robert Koenigsberger said in a statement.
There is still more to be done. Fausto Sportorno, an economist at Orlando J. Ferreres y Asociados in Buenos Aires, said on Radio 10 that now the government must contend with a fiscal deficit and restart an economy that has been stagnating for nearly a decade.
In a note to clients, Nikhil Sanghani, an economist at Capital Economics in London, said the restructuring agreement may not be enough.
"We doubt that the deal is enough to bring sustainability to Argentina’s public debt over the medium to long term," he wrote.
"The agreement only includes small nominal haircuts of 3% on most dollar bonds, which would barely make a dent in Argentina’s large debt stock. And the country’s debt dynamics are dire. We think this deal would merely allow Argentina’s public debt to stabilize at around 100% of GDP over the coming years. As a result, while the IMF may now deem the debt as sustainable (which it defines as the public debt ratio falling towards 60%), we suspect it will have to change tack later on. The upshot is that another restructuring may be required further down the line."
This was Argentina's ninth sovereign default. In early 2002 Argentina set a then-record for a $100 billion default on principal and interest It was finally completely settled in 2016 by the prior administration. The government under former President Mauricio Macri ended the impasse with a payout of $4.65 billion to holdout investors that sued for better terms. Those holdouts succeeded in locking Argentina out of the international capital markets for more than a decade.
Esteban Fernández Medrano, an economist at MacroVision Consulting and GlobalSource Partners in Buenos Aires, told LatinFinance that Tuesday's deal will keep the country out of the legal wrangles that prevented the country from accessing international capital markets for so long after the 2002 default.
Even so, attention has already shifted to what is next — and how the government can tackle its next big challenges of rebuilding the economy and reducing the fiscal deficit before it can access international funds to help in the rebound.
José Ignacio Bano, head of research at InvertirOnline.com, a brokerage firm in Buenos Aires, said the debt restructuring was the first step to be able to return to borrowing on international financial markets, but he doesn’t expect an issue until next year “with luck” even despite the ample liquidity in the world and low interest rates.
“We have to celebrate the debt restructuring deal because otherwise we wouldn’t be able to advance to the next stage,” he told LatinFinance. “But the next stage is not any easier than this one.”
Reaching a deal with the IMF, he said, should be relatively straightforward given that the multilateral lender oversaw and supported the deal with the private creditors.
But reducing what Bano called an “immense” fiscal deficit won't be easy at all. The deficit, which had almost reached a balance at the end of 2019, widened during the pandemic, with some estimates putting it at as much as 10% of GDP because of a decline in tax collections during the lockdown and an increase in spending on subsidies and social welfare. Without access to the markets, the government has been financing its spending by printing pesos, which is raising the risk of faster inflation.
“The challenge now is how to keep going without falling into hyperinflation,” Bano said.