Monday, February 26, 2024

ECONOMY | 18-04-2020 08:50

Bonds gain after debt restructuring proposal, but some investors left cold

Markets and analysts react as Economy Minister Martín Guzmán asks bondholders to accept three-year grace period, cut of 62% on bond interest and 5.4% on debt capital.

Argentine bonds gained after the government unveiled the outlines of its debt restructuring proposal that offered better terms than investors had anticipated.

The country’s US$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. Argentina’s ‘riesgo país' (country risk) rating dropped 12.7 percent to 3,479 points.

The moves came after the government finally revealed details of its debt restructuring proposal on Thursday, with President Alberto Fernández declaring that Argentina had found itself in “a kind of virtual default.”

Officials didn’t reveal all the specifics of their offer Thursday evening, saying it would be formally launched to creditors first. But they revealed enough to make clear that the losses for creditors holding more than US$68 billion in bonds would be significant.

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.


President of Banco de Valores, Juan Nápoli, predicted Friday that the government would return with a new offer, saying the current proposal was “too aggressive.”

“We have to wait for the details, in the meantime we’re trading rumours 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.”

Local financial outlets, including Ámbito Financiero, said multiple economists had used the term “aggressive” in reacting to the offer.

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 (it was due at press time Friday), 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 government.

On Friday, Fitch ratings agency downgraded Argentina’s long-term foreign currency bonds to “C” – one notch above default territory.


The Fernández administration said it would propose a 62-percent discount on bond interest, worth US$37.9 billion, and 5.4-percent on debt capital, worth another US$3.6 billion. It will also seek a three-year grace period to delay repayments until 2023.

“We’ve tried to understand the creditors’ preferences, [hence] the proposal entails a greater reduction in interest than capital,” said Economy Minister Martín Guzmán during a televised press conference.

“We propose changing the bond structure to one that involves a three-year grace period. Nothing would be paid in 2020, 2021 and 2022, an average coupon of 0.5 percent would be paid in 2023 and those rates would grow to levels that they are sustainable,” said Guzmán.

“Today we can not pay anything,” he added.

Guzmán said that the government had not yet reached an “understanding” with bondholders. The offer needs to be accepted by 70 percent of investors and the government will give them 20 days to decide. Argentina faces an April 22 maturity of US$500 million of bonds. If the proposal is not accepted, Argentina will move towards a default, its second in 20 years.

“This is what Argentina can fulfill. We are not signing blank cheques or papers that we are not going to be able to fulfill,” said President Alberto Fernández, who was accompanied by former president and current vice-president Cristina Fernández de Kirchner and a host of governors, as well as Buenos Aires City Mayor Horacio Rodríguez Laretta.

The announcement came with Argentina under a mandatory quarantine due to Covid-19 and gripped by recession, with high inflation and 35.5 percent of the population in poverty.

“It is our decision that the debt’s payment not suppose more postponements for Argentina,” said Fernández. “We also set out to be serious and not take advantage of the situation of the coronavirus, which has overturned the world economy, to delay the solution of this problem,” he said.


The government is attempting to renegotiate almost US$69 billion of debt. The country has been in recession for two years, which the IMF expects to worsen based on its latest projection that the country’s GDP will fall 5.7 percent this year, after a 2.2 percent drop last year and 2.6 percent in 2018.

Argentina owes US$311 billion in total, which amounts to more than 90 percent of GDP. Some US$44 billion of that is owed to the International Monetary Fund.

Guzmán said the government is working to reorganise its repayment structure with the Fund’s officials.

“We’re continuing to work with the IMF in a constructive manner... on a new programme in which Argentina won’t have to disburse any capital to the IMF in the next three years,” said the minister.

Fernández insisted that Argentina was prepared to pay its debts but could not delay its other needs, which had now increased multifold “due to the pandemic debacle.”

“We’re in a kind of virtual default,” he said.


Guzmán’s predecessor at the ministry under former president Mauricio Macri, Hernán Lacunza, offered praise for the offer, describing it as “technically reasonable” and “tactically bold,” with “no large haircut on capital,” while warning that the information provided was “incomplete.”

“I think it is a good proposal,” said Gabriel Zelpo, the director of Buenos Aires-based economic consultancy firm Seido, in comments reported by Reuters.

“It sounds better than what markets were pricing in. Bondholders were afraid of something radical, like no coupon payments or high capital haircuts,” he told the news agency.

“Six or three months ago, around then, it wasn’t an interesting offer, but today it can provide an outlet [for creditors] and limit the damage that exposure to Argentina can cause” in the current context of the pandemic, said Jimena Blanco, chief economist for Latin America at risk analysis consultancy Verisk Maplecroft. “The underlying discussion has changed because not only Argentina’s outlook has changed.”

Blanco warned that some investors might hinder the restructuring. Argentina’s complicated history with the so-called “vulture” funds looms large.

“The judicial path remains an alternative for large bondholders ... it has to be a bondholder who is willing to play a fairly long game and take that risk,” she said.

“It will be a complicated but not impossible negotiation,” said Claudio Loser, the former head of the IMF’s Americas department, who speculated the pandemic might improve Argentina’s chances.

Loser warned that “this is a negotiation – if the Argentines present this as the only option, they will be in a very difficult situation. They have to sit down and negotiate.”

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.

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