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ECONOMY | 06-04-2020 16:11

Suspension of local debt payments shows not all bondholders are equal

Plan to stop payments on some dollar-denominated debt burns investors who put their faith in domestic bonds, improves outlook for holders of international notes.

Argentina’s plan to stop payments on some dollar-denominated debt is burning investors who put their faith in the country’s domestic bonds, while potentially improving the outlook for holders of international notes.

The government said in a decree late Sunday that it will suspend all payments on foreign-currency securities issued in the domestic market for the rest of the year as it prioritises ending a painful recession and suppressing the spread of coronavirus.

At the same time, officials will continue restructuring talks with holders of US$69 billion of bonds covered by foreign law, which the government has kept paying.

While the development isn’t exactly a surprise given the economic turmoil and the government’s focus on the pandemic, it makes clear that not all bondholders will be treated equally by Argentina. And by allowing the government to save some US$8.5 billion in local payments this year, it could actually be a boon for holders of foreign-law debt by freeing up cash.

Bond prices Monday reflected the split. As local-law notes due in October tumbled six cents to 25 cents on the dollar, foreign-law counterparts due in 2021 rose one cent to 32.5 cents on the dollar.

“Global holders are pricing in that the government is moving away from equal treatment,” said Juan Manuel Pazos, the chief economist at TPCG Valores in Buenos Aires. “The local-law reprofiling gives, under that view, additional resources for the Treasury to keep globals performing until a deal is reached. That’s the working assumption.”

A decree in the Official Gazette said payments on local-law dollar debt may resume earlier if the Economy Ministry determines that it’s warranted given progress in creating a sustainable plan.

Either way, investors will have little recourse in local courts that are widely understood to be friendly toward the administration. Of course most bond-buyers knew of this very risk when they purchased the securities, which were issued when Argentina was still embroiled in a nasty feud with creditors who got burned in a 2001 default that left the country locked out of international debt markets.

“I never believed in this equal treatment business, as the government has so much more leverage on Argentine-law than on its New York-law debt,” said Edwin Gutierrez, the head of emerging markets sovereign debt at Aberdeen in London.

Payment delays

Argentina has already been unilaterally delaying payments on some peso-denominated debt, even as it kept current on overseas obligations and embarked on restructuring talks over its overseas notes. They trade as low as 26 cents on the dollar, showing that investors anticipate a painful restructuring.

President Alberto Fernández said in an interview published Sunday that the coronavirus pandemic had pushed debt talks to the back burner and that the country would prioritise the health emergency. Argentina has been on lockdown to try to stop the spread of the virus for weeks; so far there have been 1,554 confirmed cases with 46 deaths.

Even before the health crisis, Argentina was mired in recession with sky-high inflation and insufficient central bank reserves. Along with Ecuador and Zambia, it’s the country with the highest sovereign risk of non-payment in the world.

The economy will probably contract around 6.4 percent this year, but in a worst-case scenario the drop could be as big as 20 percent, according to a TPCG report.

Most of Argentina’s domestic, dollar-denominated bonds count large foreign firms as their biggest holders, with BlackRock Inc among the top investors. That had prompted speculation that the notes dominated by overseas players would get favourable treatment in a restructuring because the government would want to maintain friendly relations with companies they will need to invest in the country.

But those assumptions now seem mistaken. Argentina took the decision just one month before it was due to make a key US$1.4-billion payment on local bonds due in 2024.

The debt decree listed several public securities that are exempt from the measure, including non-transferable notes held by the Central Bank and certain dollar-denominated notes issued by the Treasury, such as those owned by the pension-fund administered by ANSES.

”Analysts can say many things about what was expected and what was not,” said Alejo Costa, chief Argentina Strategist for BTG Pactual in Buenos Aires. “But at the end of the day money speaks, and market prices reveal info better than anything. This was partially priced in, but not fully.”

by Scott Squires & Jorgelina do Rosario, Bloomberg

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