Argentina Bonds Gain on Optimism Over Restructuring Proposal
Losses for creditors holding some $70 billion worth of bonds would be massive
(Bloomberg) -- Argentine bonds gained after the government unveiled the outlines of a restructuring proposal that offered better terms than investors had anticipated.
The country’s $4.5 billion of international notes due next year jumped the most since August, climbing 2.9 cents to 33 cents on the dollar Friday. Other notes from the country rallied as well.
While government officials didn’t give all the specifics of their offer Thursday evening, they revealed enough to make clear that the losses for creditors holding some $70 billion of bonds would be massive. The terms seemed just slightly more generous than the country’s 2005 debt restructuring, one of the harshest sovereign bond renegotiations in modern history. The highlights this time around: a three-year moratorium, a 62% reduction in interest payments and a 5% cut in the value of the principal.
But in a sign of how pessimistic investors were as Argentina heads to its third default this century, those terms were actually viewed as a decent point for starting negotiations. More specifics of the proposal were scheduled to be divulged Friday.
“We have to wait for the details, in the meantime we’re trading rumors mostly,” said Alejo Costa, chief Argentina strategist for BTG Pactual in Buenos Aires. “There’s a lot of speculation, and some might see the guesstimate of the value of the offer around 35 cents on the dollar.”
Most Argentine debt had been trading around 30 cents on the dollar in the run-up to Thursday’s announcement.
Once the full offer is revealed, investors and government officials will begin what is almost certain to be a contentious negotiation process. Investors are well aware how precarious Argentina’s finances are after the economy collapsed last year, but will still try to extract at least some concessions from the left-wing government of President Alberto Fernandez.
Fitch Ratings Inc. cut its rating on Argentina’s overseas debt to C, it’s lowest grade before declaring a default. Fitch said that the proposal constituted a distressed debt exchange and warned that the proposed losses to investors could make a quick agreement difficult, increasing the risk of missed payments.
Jared Lou, a money manager at William Blair Investment Management, said there’s no way investors will accept the initial terms of the offer, but that there’s potential for a deal to be worked out.
“Argentina needs short-term debt relief, and focusing on interest payments and principal preservation might work,” he said.
Long before the coronavirus pandemic punctured global growth rates, Argentina’s economy was already in shambles amid a slide in the value of its currency and double-digit inflation. When Fernandez garnered a surprising amount of support in an August primary, it sparked a sell-off in Argentine assets as investors bet the country was heading toward its ninth default in the past 200 years.
Officials said the plan to restructure $66.2 billion in overseas debt is part of the government’s efforts to shore up the budget and reignite growth. It comes with the economy forecast to shrink for a third straight year in 2020 and the currency down by more than half over the past 24 months.
‘United Front’
“What we’re committing to today is something that Argentina can accomplish. We’re not signing a blank check, nor papers that we can’t comply with,” Fernandez said at a presentation Thursday. “Just as we’ve been a united front against the pandemic, let’s be united now to resolve this debt problem.”
Under the proposal, Argentina would start paying a 0.5% coupon in 2023 that would increase over time, so that the average interest rate would be 2.33%. The haircut on principal is equal to $3.6 billion, while the reduction on interest obligations is $37.9 billion. Investors will have about 20 days to respond once the offer is officially made tomorrow, Economy Minister Martin Guzman said.
“These terms are wishful thinking,” said Joaquin Almeyra, a fixed-income trader at Bulltick LLC in Miami. “If the government wants to do business, the numbers have to work for everyone. The problem right now is that there are no good numbers for Argentina.”
Since taking office in December, Fernandez has already pushed back bond payments for some peso- and dollar-denominated securities governed by local laws. While he made those moves unilaterally, backed by a friendly court system, the bonds covered by New York law present a new test.
Economy Ministry officials and bondholders were at odds earlier this month over how long the country might go without making debt payments. Representatives from investment firms including Blackrock Inc., Pacific Investment Management Co., Ashmore Group Plc, Greylock Capital and Fintech Advisory Inc. have been involved in the talks, held via video conference.
The country has $3.5 billion in payments on foreign-law bonds due in the remainder of 2020, according to Buenos Aires-based consultancy 1816 Economia y Estrategia, including $500 million of interest due on April 22. Fernandez’s administration has also been in talks with the International Monetary Fund to rework a record $56 billion financing agreement signed in 2018.
IMF officials said before the restructuring proposal was unveiled that a “meaningful contribution” will be necessary from private bondholders to ensure debt sustainability
‘Breathing Room’
“For Argentina, a country with a long track record of default, to come and offer a haircut on interest but not as much on capital, I think is relatively good news,” said Jimena Blanco, head of Latin America research at consulting firm Verisk Maplecroft in Buenos Aires. “If you are able to settle the debt restructuring in this context, at least it provides some breathing room for the government.”
Fernandez is looking to reach a negotiated settlement with creditors and avoid a hard default that would result in a costly and lengthy legal fight.
But the government must decide on how confrontational it wants to be with the economy in such a precarious place. The country remains largely under lockdown through at least April 26 to halt the spread of coronavirus, and gross domestic product may contract 5.4% this year because of the pandemic, according to a Goldman Sachs Group Inc. forecast.
Argentina has a total debt load of more than $323 billion, equal to 89% of GDP, and its foreign reserves have tumbled more than 40% over the past year to $43.9 billion.
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