As Argentina careens toward a default, investors are paying a premium for bonds that they think will give them more negotiating power.
They’re delving deep into legal rules governing the securities, searching for language covering collective action clauses that come into play when borrowers want to change contract terms, as in a restructuring. Notes that require a higher percentage of investors to sign off on any deal often trade at a premium of about 25 percent over those with a lower threshold.
Bondholders have good reason to think the issue will soon be in play. President-elect Alberto Fernández says Argentina needs debt relief to make its finances sustainable, while signaling he’s hoping for a fairly friendly restructuring to push back payments on the bonds. Ahead of any talks, investors are taking positions in notes issued in 2005 and 2010 that require sign-off from at least 85 percent of holders of all bonds affected to make changes, versus the 66.67 or 75 percent threshold on securities issued more recently.
Jim Craige, a money manager at Stone Harbor Investment Partners LP, which is one of the top holders of the euro-denominated bonds issued in 2010, said investors buying notes with the higher CAC levels are gearing up for a “long, long” process to protect their interests and get a fair deal. “The owners of these bonds are willing to go to the mat with Argentina on this.”
They may have to be. The last time disgruntled creditors took Argentina to court over restructuring terms, following the country’s record US$95-billion default in 2001, the saga dragged on for 10 years. Already this year, some of the country’s biggest investors have formed a group for negotiations.
While most of Argentina’s debt is now trading at about 40 cents on the dollar – essentially reflecting investors’ bets on recovery value – some of the dollar- and euro-denominated bonds with more stringent CACs fetch a premium of about 10 cents.
For example, dollar-denominated notes due in 2033 are quoted at 51 cents on the dollar, while securities with the lower CAC level due in 2028 and 2036 trade for 39 cents. A higher-CAC euro-denominated note maturing in 2033 is at 48 cents, while a lower-CAC note that comes due five years earlier is at just 38 cents.
Collective-action clauses have a particular significance for Argentina investors because of the outsize role they could have played in the 2001 default. At the time, its notes didn’t have any rules that would compel investors to accept a deal if a supermajority of creditors agreed. Instead, each bondholder could choose whether or not to accept the terms.
That created the class of so-called holdouts who didn’t take part when Argentina reached a deal with the owners of about 93 percent of its debt. Most of these creditors – including Paul Singer’s Elliott Management – reached settlements with the government in 2016 at terms considerably more favorable than other investors got.
The notes issued in the restructuring all contained CACs in a bid to prevent small creditors from blocking any future deal that was accepted by the main holders.
For these bonds to be modified in a broad debt restructuring, the government needs the consent of 85 percent of holders of the total principal amount outstanding, as well as 66.67 percent of holders of each bond involved in the deal. That means that a block of investors holding just 15.1 percent of the outstanding amount of all bonds, or 33.4 percent of a single bond, could veto any accord they didn’t like.
While the global bonds issued since 2016 also have CAC clauses, they are less strict, meaning the government would need to gather a smaller majority to impose a restructuring. Most of these bonds have the threshold set at 66.67 percent of all bonds involved and 50 percent of each note. Alternatively, the government can have the support of the holders of 75% of all bonds involved in the deal to push through a restructuring, if it meets certain additional requirements.
Given the likely greater difficulty in changing rules on the notes with the higher threshold, there’s a chance the bonds issued in 2005 and 2010 would be restructured on more favorable terms or perhaps avoid it entirely, according to Carolina Gialdi, a fixed-income sales person at BTG Pactual in Buenos Aires.
If the government decides to restructure the bonds separately, negotiating different terms for each bond instead of doing it all at once, it will need the consent of 75 percent of the holders of each note. The rule is the same for the older and newer securities.
Restructuring bonds separately usually requires more work, so issuers generally go with a combined restructuring in which the CACs play a very important role, according to Eugenio A. Bruno, a Buenos Aires-based lawyer specialised in sovereign debt.
Among bonds with higher CACs, a few have relatively small amounts outstanding and might be attractive for investors seeking a stake large enough to block a restructuring deal, according to Ezequiel Zambaglione, the head of strategy at Balanz Capital Valores in Buenos Aires. He said funds that specialise in distressed assets might be particularly keen on the trade.