Bondholders warn Argentina not to make debt ‘uninvestable’
Some of Argentina’s biggest bondholders say they are ready to negotiate with the incoming government led by Alberto Fernández over roughly $50bn they are owed in sovereign debt, but warn that too harsh a restructuring would make the country “uninvestable”.
After months of informal conversations involving Greylock Capital Management, T Rowe Price, GMO and more than two dozen other bondholders, a subset of creditors has begun to band together in a formal committee to ensure a unified front when talks begin with Mr Fernández’s team.
The group is pushing for a deal in which bondholders give the government more time to pay back its debts without so-called haircuts, or losses on the face value of the bonds — an approach previously endorsed by Mr Fernández. Investors see this as a good starting point, but warn there is a limit to what they will endure.
“If they attempt a major haircut or a deep restructuring on the debt like they did back in 2005, they are risking Argentina becoming really uninvestable,” said Carl Ross, a partner at fund manager GMO. “There may come a point where a lot of international bondholders may say there is no price at which they can own Argentina.”
Discussions around how to stretch out or cut unaffordable debt repayments for Argentina began before Mr Fernández became president-elect last month. In August the incumbent Mauricio Macri announced the country sought a “voluntary reprofiling” of longer-term debt held mostly by foreign investors. In addition to postponing $7bn of payments on short-term local debt, Mr Macri said the country would need to delay repayment on $44bn of loans already disbursed by the IMF from its record-breaking $57bn bailout agreed last year.
Following meetings in Washington with IMF officials and associates close to Mr Fernández, creditors have braced themselves for more protracted negotiations after hearing the institution is considering conditions on further funds that could force bondholders to shoulder more pain. Argentina’s dollar bonds have slipped as a result and now trade at around 40 cents on the dollar — about half of their value three months ago.
One creditor in the group said a 40 per cent cut to the face value of the bonds — one potential solution — would be too steep, warning that a settlement “that severe” could lead to contentious, multiyear negotiations. “If [the government] is looking to return to market access within 18 to 24 months, they have to walk that walk,” the person said.
Jared Lou, a portfolio manager at NN Investment Partners, said “harsh” treatment could even provoke legal action. “No one wants to be in court another decade. That is the worst case for everyone,” he said. “The more [losses] that Alberto Fernández tries to impose upon creditors, the more likely we are to end up in that situation again.”
Negotiations are unable to begin in earnest without a firmer sense from Mr Fernández about which economic policies he will pursue, and what relationship he seeks to have with the IMF, stressed Anupam Damani, a portfolio manager for Nuveen’s global fixed income team.