Malbec bonds beat defaulted Argentine peers on investor hope

A glimmer of hope is lurking within Argentina’s default-ravaged debt landscape: Bonds sold by Mendoza, the Andean-bordering province famed for exports of full-bodied Malbec wine.

Mendoza’s bonds are trading near a four-month high, even after some bondholders rejected its latest restructuring offer. The province stopped servicing its debt in June after failing to reach agreement with creditors and missed a US$25-million coupon payment. Even so, markets are optimistic that less-profligate pre-pandemic spending policies, not to mention all that wine, will buoy the province as it renegotiates US$590 million of local and international debt.

It’s a very Argentine narrative. In a matter of months, Mendoza notes went from being among the nation’s best-performing to becoming embroiled in negotiations and then defaulted. Yet the debt is valued higher than notes sold by Buenos Aires Province or the national government, reflecting optimism over a better outcome than its provincial and sovereign cousins, which are also in talks to restructure after defaulting.

“Their economy won’t be hit as hard as other parts of Argentina,” said Oren Barack, managing director of fixed income at New York-based AGP Alliance Global Partners. Besides, “people are still drinking wine.”

Mendoza’s exports rose by more than 19 percent in the first quarter, driven by food and beverages, according to Fundacion ProMendoza, an organisation that promotes exports from the province. In that pre-pandemic period, the province’s wine exports increased more than 63 percent by volume.

Mendoza’s wine industry accounts for half the province’s exports and more than 80 percent of Argentina’s total wine exports, according to a Mendoza government website.

Still, the Ad Hoc Group of Bondholders rejected the province’s amended debt proposal on Wednesday, according to an emailed statement from the group. The group didn’t disclose the percentage of creditors it represents.

“While the amended offer represents a clear improvement to the initial proposal, it still does not reflect adequately the medium-term payment capacity of the province,” they wrote.

The new offer reduces the grace period and ensures that investors will be paid accrued interest, starting in November 2021. Bondholders who accept new notes at a reduced interest rate will receive the bond’s first principal payments in 2023.

The offer would also pay investors who tender before July 20 an early payment of US$41.88 for every US$1,000 in principal exchanged, an amount roughly equal to the coupon payment Mendoza missed on May 19, according to a report from Buenos-Aires based consultant Portfolio Personal Inversiones. The firm puts potential recovery values on the bonds near 76.7 cents on the dollar, assuming a 10 percent exit yield.

“Mendoza’s significant sweetening of terms could bode well for other provincial restructuring deals that are pending,” analysts including Joaquin Bagues, head of strategy of Portfolio Personal Inversiones wrote. “In particular, it may help underpin the bond prices for Córdoba, Neuquén, and CABA,” they wrote, referring to two other provinces and the city of Buenos Aires.

The province extended its deadline on Monday for bondholders to accept the restructuring offer until July 27.

Mendoza’s bonds due in 2024 fetched about 53 cents on the dollar on Wednesday, lingering near the highest since March, according to data compiled by Bloomberg. The notes rose 5 cents since the missed payment. Debt due in 2027 from Buenos Aires fetches about 43 cents on the dollar, while federal government bonds maturing in 2028 trade at 42 cents. All three have flat trading recommendations from the Emerging Market Traders Association.