Buenos Aires Province Asks for Consent to Delay Debt Payment
The province, Argentina’s largest, said it has “limited financial resources” and needs to delay the $250 million in principal it’s supposed to pay Jan. 26 to holders of notes due in 2021. Owners of at least 75% of the securities must accept the proposal to push the payment date to May 1 in order to change the terms of the notes, according to a filing.
The bonds extended a slide Tuesday, suggesting holders weren’t thrilled with the idea of accepting a delay in payment with no additional compensation. The proposal was a tough opening salvo as Argentina gears up for talks designed to make its debt more manageable. Buenos Aires province Governor Axel Kicillof is strongly aligned with the Peronist federal government, and his treatment of creditors has been seen as a first test for investors as President Alberto Fernandez formulates his own strategy for seeking debt relief.
The province’s “economic team has decided to utilize a bit of fright-night hardball by allowing Axel Kicillof to play some brinkmanship,” said Joaquin Bagues, head of strategy at Portfolio Personal Inversores in Buenos Aires. “Axel could use the pressure of an imminent default to propose a comprehensive debt exchange.”
The bond’s rules say that an event of default will have occurred if a principal payment is at least 10 days late. If that happens without any change to the terms, holders of at least 25% of the debt can move to demand immediate repayment. The province set a Jan. 22 deadline for holders to agree to the delayed payment.
The uncertainty over whether the province will come up with the money has whiplashed bondholders in recent days, with the price swinging between 60 cents and 69 cents on the dollar. Just on Monday, the notes plunged after the country’s economy minister said the government won’t bail out the province. Fernandez repeated those comments late Monday.
The notes tumbled 3.9 cents to 55.6 cents on the dollar Tuesday, reaching the lowest since mid-December.
“The national and provincial government share concern over the lack of debt sustainability, as well as the need to arrive at debt policies that guarantee a long-term solution,” the province’s economy ministry said in a statement. “That is why we consider a delay of the next principal payment necessary.”
The province, home to about 40% of Argentina’s population, owes investors a total of $571 million this month and faces another $700 million in principal payments in June, according to Walter Stoeppelwerth, chief investment officer at Portfolio Personal Inversiones in Buenos Aires.
A Buenos Aires official said Jan. 10 the province was engaged in talks with private creditors to refinance its debt. The bonds had been among the world’s top performing securities in the past few months, returning 54% from August until Jan. 8, when the province reached out to creditors to seek informal talks.
The province, like the sovereign and other Argentine issuers, has been slammed by sluggish economic growth, fast inflation and a plunge in the peso that made payments in dollars more expensive. The federal government has already unilaterally pushed back maturities on some local short-term notes to cope with the shortfall and implemented capital controls to prevent hard currency from leaving the country.
Fernandez said Sunday that the national government plans to have its debt situation figured out by March 31, declining to go into details, The government has asked for proposals from creditors and advisers on how to make its debt load sustainable and will seek to alter a record $56 billion agreement with the International Monetary Fund.
The implied probability of non-payment by the government of Argentina over the next 12 months stands at 74%, according to credit-default swap data provided by CMA.
While delaying the payment due this month may buy the province some time to avoid a hard default, a reckoning has to come eventually, according to Bagues.
“If there is no credible plan, the risk of a default grows exponentially,” he said.