Some 15 years after hitting foreign investors with one of the harshest sovereign bond renegotiations in modern history, Argentina unveiled a proposal for a new debt restructuring that appears to offer only slightly more generous terms.
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 US$70 billion worth of bonds would be massive. The highlights: a three-year moratorium, a 62 percent reduction in interest payments and a five-percent cut in the value of the principal.
Final details were scheduled to be divulged Friday, effectively marking the beginning of what stands to be a contentious negotiation process between the two sides. Investors were well aware that the terms of the proposal were going to be harsh after Argentina’s finances collapsed last year – they had pushed the value of benchmark bonds down to deeply distressed territory – but will still try to extract at least some concessions from the left-wing government of President Alberto Fernández.
The recovery value implied by the proposal is about 30 cents on the dollar, although more details are needed to get a clearer picture, according to Siobhan Morden, head of Latin America fixed income at Amherst Pierpont. That would be in line with the losses Argentina stuck investors with after its 2001 default.
“There’s no way those numbers are going to fly, but the framework could be worked on,” said Jared Lou, a money manager at William Blair Investment Management. “Argentina needs short-term debt relief, and focusing on interest payments and principal preservation might work.”
Long before the coronavirus pandemic sank much of the world into recession, Argentina’s economy was already in shambles amid a sharp drop in the value of the currency and double-digit inflation. When Fernández garnered a surprising amount of support in the August PASO primaries, it sparked a furious sell-off in Argentine assets as investors bet that the country was heading toward its third default this century and ninth in past 200 years.
Officials said the plan to restructure US$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.
“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,” Fernández 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-percent coupon in 2023 that would grow over time, so that the average interest rate would be 2.33 percent. The haircut on principal is equal to US$3.6 billion, while the reduction on interest obligations is US$37.9 billion. Investors will have about 20 days to respond once the offer is officially made tomorrow, Economy Minister Martín Guzmán 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, Fernández 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 US$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 US$500 million of interest due on April 22. Fernández’s administration has also been in talks with the International Monetary Fund to rework a record US$56-billion financing agreement signed in 2018.
Officials at the IMF said before the restructuring proposal was unveiled that a “meaningful contribution” will be necessary from private bondholders to ensure debt sustainability.
“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.”
Fernández 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 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 In. forecast.
The country has a total debt load of more than US$323 billion, equal to 89 percent of GDP, and its foreign reserves have tumbled more than 40 percent over the past year to just US$43.9 billion.
Behind the scenes of the bilateral: What did Alberto Fernández and Joe Biden say to each other?
– With assistance from Ignacio Olivera Doll and Silvia Martínez.
by Scott Squires, Jorgelina do Rosario & Patrick Gillespie, Bloomberg