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Debt deal almost fully excludes ‘vulture’ risk

99% of bonds included in restructuring, far above the problematic 2005 deal

By | [email protected] | September 10, 2020 4:20pm


Putting an end to its ninth sovereign debt default, Argentina successfully restructured almost all of its USD 65 billion debt with private foreign creditors, as the Economy Ministry revealed that 93 percent of them accepted the government’s offer. That figure jumps to 99% with the activation of collective action clauses (CACs), which force minorities to accept the terms agreed by the majority.

The wide acceptance of the deal left only a pocket of holdouts on individual bonds and a very low risk of litigation at court, which the country had to deal with for almost a decade following the previous 2005-2010 debt restructuring. Still, the Fernández administration will try to reach a deal with them to so avoid any bad surprises.

If followed by a successful negotiation with the International Monetary Fund (IMF), Argentina will now have years of low debt payments and less pressure on its foreign currency reserves, although massive economic problems still have to be solved in the next five years, before big international maturities start kicking in again.

“The restructuring reduced interest payments but the debt capital is still intact. Argentina delayed its commitments until 2025 and after that it will have difficult years,” Sebastián Maril, analyst at FinGuru, told The Essential. “Argentina never did what it had to do and I don’t think this will change in five years.”

Differences with 2005

The swap of 99% of Argentina’s bonds draws a stark contrast to 2005, when investors holding almost a quarter of the notes outstanding rejected the bond exchange they were offered. That entrenched minority created all sorts of problems for Argentina, including a decade-long court battle with billionaire Paul Singer’s Elliott Management, who froze payments of Argentina’s remaining debt and was baptized as a “vulture” by country officials.

To reach a deal this time around, Argentina compromised on its initial stance after months of back-and-forth. The country offered creditors well over $13 billion dollars more in its final proposal than in the original one, with critics arguing it will struggle to find the money to pay back when bonds are due, as opposed to 2005, when the country’s steady growth secured comfortable payments.

The government issued a total of USD 63.2 billion new dollar-denominated bonds as part of the exchange, and 4.18 billion euros (USD 5.01 billion) of debt denominated in the single currency. President Fernández said the country had been in a “labyrinth” of debt that had now been solved, optimistically comparing the situation to the swap of 2005.

Some analysts are also positive about the swap, but opinions are divided. “The result was excellent. It was done quite fast considering the average timing of previous negotiations,” said Martín Kalos, head of EPyCA consulting firm. “It lowered the interest rate, cleared the payment horizon and provided some basic certainties needed to raise credit for Argentina’s capital and financial account.”

Can the 1 percent sue?

The creditors that didn’t accept the restructuring hold bonds worth USD 653 million, corresponding to two series in dollars and in euros from the 2010 debt swap. Most of them are European retail investors with which the government hopes to continue negotiations in the coming months.

In a recent interview with Bloomberg, Economy Minister Martín Guzmán said he didn’t consider seeing the reduced group of creditors who didn’t accept the restructuring as a problem, claiming the Fernández administration “will continue working with them” in order to reach a deal.

With most of them being retail investors, the risk of the issue being taken into courts is quite low as of now. Nevertheless, this could change if larger holdout funds offer to buy the bonds from them, leading to a new legal battle. The bonds haven’t defaulted yet, so it remains to be seen whether Argentina will continue making payments.

“Singer went to court against Argentina with just US$880 in bonds, which is similar to the holdouts from this new restructuring,” said Maril. “As retailers they don’t have real strength to go to court. But if international funds end up buying the bonds they would have better chances for litigation.”

Several debt deals

As well as striking a deal with most of its foreign creditors, the Fernández administration also entered into successful talks with its local creditors, 98.8% of which already said yes to the debt restructuring in the early acceptance period. The window will close next Monday for the rest of the creditors.

Once that negotiation closes, the next step for the government will be to renegotiate its US$44 billion in debt with the IMF, seeking to replace the financing arrangement sealed under Mauricio Macri in 2018. The Fernández administration has already said it will only request enough money to refinance the existing obligations, and not ask for new loans.

The deal with the foreign creditors and the separate restructuring of local-law dollar debt would bring financial relief of US$37.7 billion over the 2020-2030 period, and help cut average interest payments on foreign law bonds to 3% from 7%, according to estimations by the Economy Ministry.

Dollar scarcity

Although the deal allows to clear maturities over the next years, Argentina’s dollar debt remains high for an economy whose balance of payments continues to be on the red, so the risk of another default could rise after some time that cycle is not inverted.

Despite that, Fernández has mostly stressed that the priority will be to “reactivate the domestic market”, as he said in a rally last week.

The government is set this month to lay out its budget for 2021, which will give some idea of its plan to revive an economy likely to contract around 12.5% this year, the third straight year of recession. The budget includes a 4.5 primary deficit and a public works and housing program of 800 billion pesos.

“Argentina needs to start thinking how it will generate more dollars. This requires a more diversified productive economic structure and coordinated policies between the state and the private sector,” Kalos told The Essential. “It’s not just doing debt calculations, these are much more difficult processes, especially in an economy with a deep crisis.”