Argentina's populist leaders, Juan and Eva Peron in 1951. Source: Wikimedia
Argentina's current first couple, former President Nestor Kirchner, and current President Cristina de Kirchner Source: AFP
In 2001, Argentina defaulted on billions of dollars of sovereign bond debt, closing itself off from access to the international capital markets. For years thumbing its nose at global capital, the Argentine government left the country’s borrowers severely underfunded, and infrastructure and other important investment spending suffered. Once thought of as a rich country and a middle power (say, around 1900), Argentina’s long slide has been the result of economic mismanagement stretching back a century, including by Argentina’s most famous first couple, Juan and Evita Peron (pictured above).
Argentina’s current first couple, who managed to pull off a “Hillary” in 2007 by transferring power from husband to wife, which even the actual Hillary couldn’t pull off thanks to Barack Obama, has launched a second bond restructuring this week that Carola Sandy of CreditSuisse (see below) believes will include 90% of the defaulted bonds. If Cristina and Nestor pull this off, Argentina can once again re-enter the global capital markets, and with its riches and economic potential, may have a shot at becoming a regional power again. With good economic management, Argentina could once again represent a counterweight to rival Brazil, our textbook rising power. This rivalry under the stars of the southern hemisphere is fought not only on the soccer field. Have a look at the thorough CreditSuisse note below.
Argentina
Carola Sandy
+1 212 325 2471
[email protected]
Yesterday evening (22 October), Economy Minister Boudou announced that the government had accepted a proposal submitted by a group of investment banks to restructure the untendered bond debt. Boudou said that the proposal received was a “good base” to define the final terms of the new restructuring. Thursday’s announcement did not have as many details as the market might have been hoping for, but, in our view, it was still a positive development for two reasons. First, the government outlined concrete steps that it plans to take in the near term – it will seek approval for the transaction from the Argentine congress and from securities regulators. Second, according to Boudou, the proposal is backed by holders of about $10bn worth of defaulted bonds (50% of the outstanding amount of defaulted bonds). The fact that holders of such large amounts of defaulted bonds are on board suggests, in our view, that the terms of the upcoming transaction (albeit still unknown) cannot be much worse than those offered in the 2005 swap.
The government will send to congress, on Monday 26 October, a bill to seek congressional approval for this transaction. In 2005, congress approved a law – the so-called Bolt Law or Ley Cerrojo – that precludes the government from carrying out a new debt swap without congressional approval. The Kirchner coalition and its allies have majorities in both houses of congress and, thus, we expect the bill to be approved relatively quickly (in recent weeks, the government has obtained congressional approval for more controversial legislation, such as the media reform bill).
Boudou said that the financial terms of the new restructuring will be more favorable for the country than those of the 2005 bond swap. The prospectus filed with the 2005 debt swap included a so-called “most favored creditor” clause that said that if the government were to come to a more favorable agreement with creditors in the future, all creditors who had accepted the 2005 offer would have the opportunity to trade up to the better deal. Thus, it was broadly expected that the terms of any new restructuring would likely be worse, from the bondholders’ perspective, than those offered in 2005. We think that, by offering worse terms in the new restructuring, the government also seeks to build domestic political support for the transaction. In fact, Minister Boudou said the bill that will be sent to congress will expressly note that the new transaction will be “more beneficial for Argentina” than the one carried out in 2005. Boudou also noted that the government will not pay the fees of the investment banks (and, thus, we assume that these will be picked up by the bondholders).
Boudou also said that the government will seek a haircut to the principal in default of “at least 65%”. The haircut in the 2005 restructuring was 66.3%. Our base-case scenario is that if the government does seek a larger haircut to the principal in default than it did in 2005, it will be a token increase from the previous 66.3%, i.e., the size of the haircut will be increased a couple of percentage points. If the government were to seek a significantly larger haircut, we believe this would not be consistent with its objectives of having high participation in the transaction and of re-entering the international capital markets in the future.
The new restructuring will have a “new cash” component. Bondholders who tender defaulted bonds in the swap will have to buy new bond. Boudou said that the government will seek to raise about $0.10 for each $1 worth of defaulted bonds that investors tender in the swap (this is in line with our expectations). Boudou noted that the government has not defined yet the characteristics of the new bond (its currency or maturity), but he observed that the government “aims to pay a single-digit interest rate” on the new bonds. Boudou said that retail investors would not be asked to put in new money to participate in the swap (the government will probably exempt small orders from the “new cash” component).
We expect the government to announce additional details of the transaction in coming days. Boudou said that the government hopes to close the transaction “as soon as possible”. Thus, we expect more details to emerge in the very near term. At Thursday’s press conference, Boudou made no reference to how the government will compensate bondholders for the interest accrued since 2005, and did not explicitly say whether the new offer would include the GDP warrants. However, Boudou did say that the GDP warrants “were a good instrument for both the government and the bondholders,” thus implying that these would be again part of the deal. Our expectation is that the government will issue a bond in the middle part of the curve to compensate bondholders for the interest accrued and for the past payments on the GDP warrants. Given that we still have no official details about the exchange proposal, we refer our readers to our Debt Trading Monthly published on 16 October 2009 for estimates of the fair value of the exchange under different scenarios (these values are in the 40-50 range as a percent of the claim amount).
Boudou said that the government expects that at least 60% of the defaulted bonds will be tendered in the swap. The improvement in credit market conditions bodes well for a successful bond restructuring – i.e., 60% and possibly more of the defaulted bonds could be tendered – if the terms of the new swap are reasonably aligned with those acceptable to bondholders. We think that this is likely to be case. As we noted above, we view the fact that holders of $10bn worth of defaulted bonds have expressed their intention to participate in the swap as an indication that the proposal being considered by the government is not much worse than the one offered in 2005. If participation in the new swap is at least 60%, this would imply that 90% of the bond debt that was defaulted in 2001 has been restructured (and this would help the government deal with remaining lawsuits by holdout bondholders and would increase the chance of an upgrade of the country’s sovereign credit rating).
The government will start filing today (Friday 23 October) the required paperwork with the SEC in the US, and with securities regulators in Germany and Italy. It is unclear how long it will take the SEC (and the other regulators) to complete the review of the documentation submitted by the government. In our view, the timetable of the transaction will be largely driven by how quickly the security regulators approve the documentation (a process that could take a few weeks). However, even if the process of obtaining SEC approval goes smoothly, we would not rule out delays due to legal challenges. Boudou was quoted by Reuters as saying that the government expects to close the transaction in 45 days. We think that it will be very difficult to close the transaction so quickly; instead, we expect the bond swap to settle sometime in Q1 2010.
Boudou noted that the restructuring of the untendered debt is one of the steps the government is taking to enable Argentina to re-enter international capital markets. We think that the restructuring will lead to a further tightening of Argentina’s sovereign credit spreads and, thus, it will be a significant step towards accessing international capital markets again. Other steps that would help with this objective (which the government said it plans to follow) are re-establishing a relationship with the IMF, curing arrears with the Paris Club and restoring credibility to the official statistics.
