Investors are souring on how much they can recoup from a potential default, as President-elect Alberto Fernández procrastinates on plans to save his nation from financial ruin.
Argentine dollar bonds due in 2028 now fetch as little as to 36 cents on the dollar – a drop of about 20 cents since the immediate aftermath of the Peronist's surprise primary victory in August. A mountain of debt, staggeringly high inflation and little sign of who Fernandez will pick for his cabinet – and which policies they will implement – have bondholders begging for clarity.
“It doesn’t inspire confidence for effective crisis management,” according to Siobhan Morden, who runs Amherst Pierpoint Securities’ Latin America fixed-income strategy from New York. “If there is no obvious growth model and no commitment for fiscal reform, then the burden may shift to bondholders for debt relief.”
The information void surrounding Fernández’s economic policies or specific restructuring plans means some analysts are hesitant to be specific on how much bondholders will ultimately get if Argentina reneges on payments.
Morden puts the figure at between 35 and 40 cents, implying a 50-percent principal haircut, payment in kind and a five-year maturity extension, in a recent note. Juan Manuel Pazos, chief economist at Buenos Aires brokerage TPCG Valores, pegs it at 40 cents. For Ezequiel Zambaglione, head of strategy at Balanz Capital Valores in Buenos Aires, a “hard default” would push bond prices below 30 cents, while a “friendly negotiation” could mean investors get more than 50 cents.
The expectations represent an enormous gap from the closest Fernández has gotten to addressing investor concerns: in the run-up to the election, he repeatedly referred to Uruguay’s 2003 default, which left creditors with a loss of just 20 percent. In the meantime, while bondholders have begun to prepare for a renegotiation, little can be done without details on how the incoming leader will behave.
Investors understand the “poison chalice” that Fernández inherited, said Edwin Gutierrez, a London-based head of emerging-market sovereign debt at Aberdeen Asset Management. “We never believed the 20-percent haircut, nor does the market. Bonds wouldn’t be here if that were the case.”
That said, if Fernández can steer policy without the heavy hand of his running-mate, former president Cristina Fernández de Kirchner, it may be enough to reassure money managers and invite a honeymoon at the beginning of his term, said Ray Zucaro, chief investment officer at RVX Asset Management in Miami. Should Fernández clarify his plans and express a desire to work with creditors, “It could turn quickly,” said Shamaila Khan, the New York-based director of emerging-market debt at AllianceBernstein.
For now, though, Argentina’s closely watched century bond is trading at just about 37 cents – half its value before the August market meltdown. It’s among notes governed by foreign laws, including those due in 2021, 2028 and 2048, that fell to all-time lows on Wednesday. The 2028 bonds were trading at 35.8 cents as of 1.26pm New York time.
Credit-default swaps already imply a 98-percent probability that Argentina will stop making debt payments within the next five years, compared with 75 percent right after the primary and 49 percent just before the vote. Fernández, who has a dwindling stock of net reserves, is widely expected to renegotiate Argentina’s US$56-billion line of credit with the International Monetary Fund.
Bad news is still piling up. In a UK lawsuit, three hedge funds – Palladian Partners LP, HBK Master Fund LP and Hirsh Group LLC – say Argentina restated economic figures to avoid paying out on securities tied to its growth. The funds want the nation to fork over 384 million euros (US$423 million) in compensation. And on Tuesday, Fernández threw his first barbs at US President Donald Trump, expressing an opposing view over political upheaval in Bolivia.
“He has been sounding more radical than expected, and investors started to increase the probability of a hard default,” said Balanz’s Zambaglione.