Argentine bonds leap higher, shrugging off tough debt deal, downgrade
Hugh Bronstein, Walter Bianchi
Argentina’s over-the-counter bonds closed up an average 7.3% as bondholders digested a debt revamp offer officials laid out on Thursday and formally shared on Friday that would involve over $40 billion of relief, mainly from reduced coupon payments.
Argentina now faces negotiations to win creditors over to the deal, with many saying the current offer, seen in a government document on Friday evening, would struggle to persuade enough bondholders to meet thresholds needed under collective action clauses.
The government’s formal offer involved dollar and euro bonds to international creditors, with the first crop not due to expire until November of 2030, according to the document. The earliest of the bonds included in the restructuring was set to mature this year.
Carlos Abadi, managing director at financial advisory firm DecisionBoundaries, said he saw the offer as “a good starting point for the negotiation, but it needs to be cleaned up,” and that “all creditors must be given the same extensions and haircuts, to keep the negotiation from ending up bogged down in court.”
Carlos de Sousa, emerging markets analyst at Oxford Economics, said in a note sent earlier on Friday that there was a serious risk the country could miss payments if the offer did not gather enough support from bondholders.
He said the offer suggested a net present value haircut of around 65%, which would put it slightly above current prices, which slumped last year amid political upheaval.
Argentina is facing around $500 million of interest payments on foreign debt on April 22. If that deadline is missed, that would trigger a default after a 30-day grace period expires.
‘NOT VERY ENCOURAGING’
The offer, laid out by Economy Minister Martin Guzman on Thursday, involves a 62% cut to coupons, a smaller principal haircut and a three-year moratorium on payments on around $66.2 billion of foreign-law bonds.
Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, said in a note that a 20-day deadline given to creditors to accept was too short, especially with the government and bondholders still very far apart.
“There is no urgency to accept the first offer when there are no prospects for any payments anytime soon,” she wrote.
Argentina is grappling with a larger $323 billion debt pile, even as its already-anemic economy has plummeted since the country went on lockdown to slow the spread of a coronavirus pandemic in March.
One bondholder said the initial offer “doesn’t look very encouraging”, and hoped it was more an opening bid.
“It looks like a deeper coupon cut than anticipated,” the person said, asking not to be named. “Their economic situation has deteriorated and it’s not conducive to making generous offers but I think their capacity for debt servicing is higher than what this offer requires.”
Guzman had said that the country and its creditors had not reached an “understanding” yet about what would constitute a sustainable agreement.
Traders said the bond rally on Friday was aided by improving global sentiment, punctuated by a massive pop in U.S. equities.
Fitch Ratings downgraded Argentina’s long-term foreign currency bonds to “C” - one notch above default territory - warning of an “imminent” default if bondholders reject the government’s restructuring terms.
“The substantial losses to investors that the authorities’ proposal would entail could make a fast agreement difficult to achieve, posing the risk of a protracted negotiation process and missed payments,” the ratings agency said.