As Argentina descends into a hellscape for creditors, with bond prices taking a fresh leg down as each new development saps spirits, there are a few securities bucking the trend.
Investors are sorting through billions of dollars of Argentine debt, some of it trading at deeply distressed levels below 50 cents on the dollar, in search of bonds that are being unfairly punished for the federal government’s problems.
They’re finding opportunities in some provincial and municipal notes selling at small discounts to their face value and spitting out rich coupons in a world of near-zero yields.
Notes from Buenos Aires City – not to be confused with the province of the same name, which is on the verge of default – are trading near par on confidence the capital’s strong tax revenue will keep it solvent, but still yield 9.2 percent.
Debt from Neuquén Province backed by oil revenue trades at 93 cents and yields almost 10 percent. And Mendoza’s bonds are among Argentina’s top performers this year on bets the province will maintain fiscal discipline, but still yield a whopping 15 percent for investors willing to take the gamble.
Oren Barack, the managing director of fixed income at New York-based AGP Alliance Global Partners, says investors may be missing out on opportunities in Argentina by assuming every issuer is in just as bad a shape as the sovereign.
But the financial woes forcing the federal government to seek a restructuring don’t apply equally to all the country’s issuers, creating some diamonds in the rough paying fatter yields than they would if the borrower was outside of Argentina.
Provincial governments will avoid restructuring “at all costs,” he pointed in an interview. This is especially the case for those that will need money to develop oil and gas fields, and those with relatively low debt levels and maturities a few years away, he added.
Provincial officials rushed into financial markets after former president Mauricio Macri lifted capital controls in 2015 amid a stable peso and relatively low global rates, issuing a total of US$15 billion in foreign-law debt since then, according to Natalia Etienne, an analyst for Fitch Ratings.
Investors were lured by a track record of payments that were better than the federal government’s, as well as expectations for an economic boom fuelled by Macri’s pro-growth policies.
But those predictions went belly up over the past few years as Macri’s administration failed to spark the growth he promised while inflation raged and unemployment grew.
A currency crisis that has now seen the peso lose 70 percent of its value since the end of 2017 eventually morphed into a severe recession, setting up Peronist leader Alberto Fernández for victory in the August PASO primaries.
The August surprise sent investors reeling, and along with declines in tax revenue and increases in the cost of servicing foreign-currency debt, led federal officials to announce last year that they needed to push back payments.
Sovereign bonds have since traded at 35 cents to 50 cents on the dollar, with most now hovering near 45 as creditors await the beginning of talks with Fernández’s administration.
Officials are also seeking to renegotiate terms of the government’s US$56 billion credit line with the International Monetary Fund.
To be sure, there are regional and local bonds caught up in the same woes that are hitting the federal government. Buenos Aires Province plans to restructure after making one last bond payment this month.
About US$250 million of overseas notes from Chaco, a cotton-producing province in northern Argentina, are trading near 45 cents on the dollar. Securities from La Rioja and Rio Negro are also below 50 cents.
And even the borrowers in good fiscal shape are vulnerable to sudden changes in policy that could impair their ability to repay creditors.
Luis Prato, an economic analyst at Torino Capital in New York, says the worst-hit provinces generally have a high percentage of their debt in foreign currencies and are running fiscal deficits.
Chubut’s oil-backed notes are trading near 71 cents on the dollar, but officials have said they would like to renegotiate obligations due to its fragile fiscal situation. Out of the province’s US$855-million total debt, around 80 percent is composed of international bonds, according to a January presentation.
“Debts in dollars became more expensive, and complicated the fiscal situation of these provinces,” Prato said in an email.
Large Debt, Small Problem
However, some notes backed with oil and gas royalties are considered safer, including some issued by Neuquén Province and backed by a Maryland-sized shale formation in the north of Patagonia. Good fiscal discipline is part of Mendoza’s success, with 2024 bonds trading at 80 cents on the dollar.
Buenos Aires City is also in good shape, as it has “both cash and tax revenue to face looming payments,” Juan Miguel Salerno, chief investment officer of Compass Group Argentina, said in an interview.
Its notes maturing next year are the highest-priced of Argentina’s local-government bonds. The city also has a higher proportion of peso-denominated debt.
Still, regional and local authorities owe US$1.5 billion in dollar-denominated principal and coupons through the end of the year, according to data compiled by Bloomberg.
In an address to Congress on February 12, Economy Minister Martín Guzmán indicated the federal government was working with provinces to address their financial and fiscal positions.
“Obviously, there is a problem to solve,” he said. “It’s clear that it is unsustainable that the provinces are so indebted in foreign currency, which is a problem that we have to resolve permanently.”