Buenos Aires Province may be first test for debt talks

Bondholders are gearing up for a nasty fight as the nation’s largest province stares down a debt payment it may not be able to make.

Buenos Aires Province will owe investors US$571 million in January, and is unlikely to be able to come up with the cash amid a sharp devaluation in the currency and severe economic recession. The region has few dollar-generating industries, and tax revenue has dropped 14 percent in inflation-adjusted terms this year. Refinancing isn’t a realistic option amid plans by the federal government to restructure its debt.

To make matters worse for bondholders, their adversary in any restructuring talks will be Axel Kicillof, who takes over as governor on December 11, a day after Alberto Fernández assumes the presidency. Kicillof is known to creditors as the economy minister who fought the tail end of an epic battle with debt investors after the nation’s US$95-billion default in 2001, raising concerns that this showdown could also be fierce.

“I’m afraid of what Kicillof can do,” said Joaquín Almeyra, a fixed-income trader at Bulltick LLC in Miami, who trades A rgentine bonds. “He’s shown he’s not very market-friendly.”

At least one group of bondholders is holding regular calls to organise for potential restructuring talks with the province, according to two people familiar with the matter. That contingent expects to engage in more detailed discussions with their counterparts after the inauguration, the people said.

EXPECTATIONS

Concerns about non-payment are broadly reflected in t he m a rke t , w he r e t he province’s US$500 million of bonds maturing in 2021 are already trading at about 50 cents on the dollar. That signals investors expect a painful restructuring is ahead.

Of course the province’s troubles aren’t occurring in i s o l a t i o n . T h e f e d e r a l government’s notes are trading even lower than the province’s after President Mauricio Macri announced in August that the country wouldn’t be able to meet its obligations and needed to push out debt maturities. Fernández has said he wants to work with creditors to come up with a fair solution. Argentina credit-default swaps imply a 96-percent probability of non-payment sometime in the next five years.

A spokeswoman for Kicillof said the transition team is coordinating with the incoming national government, and Kicillof has said that he shares Fernández’s priorities for renegotiating with creditors.

Outgoing Governor María Eugenia Vidal told reportersDecember 3 she believed the prov ince could meet its January debt payments, but that it wouldn’t be appropriate to tell the incoming government how to do so. The outgoing government will leave the province with 25 billion pesos (US$417 million) after posting a 2019 fiscal deficit twice that big, Vidal said.

Part of the dilemma the province faces is that even if it could scrape together the cash for the January payments, it still has another US$1.3 billion due through the remainder of the year. It might not make much sense to spend precious resources in January and then seek debt relief soon thereafter – the province could stop payments right away, save that money and start working on a restructuring, the thinking goes.

“If you’re going to default anyways, you might as well default as soon as possible,” said Paul McNamara, an investment director at GAM U.K. in London, which holds Province of Buenos Aires bonds.

Whatever strategy the province takes, it’ll likely be in close coordination with Fernández and vice-presidentelect Cristina Fernández de Kirchner, the former president under whom Kicillof served as economy minister. S h e ’ s a c h a m p i o n o f Argentina’s left whose political base is strong in Buenos Aires Province, the home to 40 percent of the country’s population.

SIGNS AND SIGNIFIERS

Broadly speaking, investors would see it as a sign of goodwill if both the sovereign and province keep making debt payments until a restructuring agreement is reached. If instead it misses payments, that could be taken as an ominous signal and hit prices of sovereign bonds and notes from other provinces, according to Walter Stoeppelwerth, the chief investment officer at Portfolio Personal Inversiones.

Buenos Aires Province bond due 2021 follows its sovereign counterpart.

“Alberto Fernández does not want to default in January, he wants to line his ducks in a row,” Stoeppelwerth said from Buenos Aires. “If Kicillof were to default, people will start to think that there’s a moral hazard, and that if they default on PBA, they default on everything.”

While Kicillof has said the province would find a way to renegotiate its debt, he’s given little indication over the terms of that restructuring, and how it would align with a debt-renegotiation at the national level.

It’s also possible that the province will ask the national government for a bailout as a stopgap while it restructures its debt alongside the sovereign, according to Carolina Gialdi, a senior fixed-income strategist at BTG Pactual in Buenos Aires.

“Kicillof is not obliged to do what Fernández tells him, but Fernández and Kicillof are politically aligned and it’s probable that they’ll announce something similar in terms of how to deal with the debt issue,” Gialdi said.