Argentina: Assessment of final restructuring terms

Argentina presented the proposed terms for restructuring its foreign bonds on Friday. The proposal is subject to regulatory approval. The final financial terms are broadly consistent with the partial terms that the government revealed on Thursday (see our flash note here). 

The terms of Argentina's debt offer

The offer gives holders of eligible bonds a limited menu of new bonds to choose from, depending on their existing holding. The exchange involves the issuance of 10 new bonds (five in US$, five in euros) and essentially consists of two exchanges, one for the bonds issued in the 2005/2010 exchanges (under the 2005 Indenture; the so-called "Kirchner bonds"), and one for the bonds issued since 2016 (under the 2016 Indenture; the so-called "Macri bonds"). The new bonds are low coupon step-ups with maturities in 2030, 2036, 2039, 2043, and 2047, each one denominated in US$ and EUR. They all have grace periods on any payments for the first three years (2020-2022), with first coupons commencing in November 2022, and long amortisation periods, although the amortisation profile differs by bond (the earliest amortisation payment is in November 2026). Holders of Macri bonds can choose between the 2030, 2036 and 2047 bonds, while holders of the Kirchner bonds can choose between the 2039, 2043 and 2047 bonds. Exchange ratios differ depending on the eligible bond and maturity of the new bond, but are consistent with the minimal principal reduction that had been reported previously. A summary of financial terms is shown in Table 1. Exchange ratios for US$ and EUR bonds are shown in Tables 2 and 3, respectively. 

The new 2030 and 2036 bonds are subject to issuance limits, with holders of shorter maturity bonds (US$ 2021-2023, EUR 2020-2023) and 2005 Indenture bonds getting priority in exchanging into these, while holders of certain other eligible bonds (2016 Indenture bonds maturing after 2023) who elect to receive these bonds may receive other bonds in accordance with a "waterfall" methodology that will be published in the invitation material. 

There are 21 eligible bonds amounting to a total outstanding of US$66.2bn – 17 Macri bonds (US$41.5bn equivalent) and 4 Kirchner bonds (US$24.7bn equivalent; counting the 2005/10 Discounts in US$ as one, and EUR as one). 

Observations 

We make five observations. 

1. Final terms: It looks like these are the final terms. It seems to us there will be no further negotiation and the exchange offer will be launched when necessary approvals have been obtained. Hence it looks like another take-it or leave-it offer, although it is not really clear how much negotiation has really taken place and how much input holders have had in terms of crafting these terms. 

2. Timing: It seems that the government will look to launch the offer when it has received the necessary regulatory consents. The government has previously said holders will have 20 days to accept the offer, presumably from its launch (so if the consent came through today, and the offer was launched tomorrow, the offer would close on 11 May). The government faces US$503mn in upcoming coupon payments due on 22 April, with a 30 day grace period lasting until 22 May. We assume the government will not pay them on due date, and hope they can complete the offer before the end of the grace period. However, timing could be tight if there are any delays or there is not enough acceptance, which raises the question of what the government would do in that situation as the end of the grace period gets closer. It is not clear they could improve the offer quickly enough, so the government will face the choice of a making the payment or a hard (payment) default, and reopening negotiations in a much more confrontational setting. 

3. Bondholder support: It is not clear to us what support the proposed terms have from bondholders. The more influence bondholders have had, the more consensus that has been reached, the more likely they will be to accept them. It is possible that Argentina has garnered sufficient support from key bondholders to move forward. However, the short space of time for debtor-creditor negotiations to have taken place in earnest (the government only presented its debt strategy on 20 March), the large stock of bonds and number of bonds (with different legal characteristics), diversity of holders and their different preferences, and questions over economic fundamentals and policy direction, suggests to us that it will be unlikely the government has got the necessary consensus so quickly; which begs the question - has it? If so, we'd expect an anchor bondholder group to come out quickly to say so, so that it might seek to influence other holders. And if not? Why present terms that are unlikely to be accepted? That said, the terms may present a floor in terms of any further negotiation.

4. Treatment of different bonds: Based on our estimated recovery values (see below), it looks like the 2005 Indenture bonds are treated better than the 2016 Indenture bonds. Whilst this may reflect politics (Kirchner bonds are treated better than Macri bonds), it may also reflect the perceived legal differences between the two classes of bonds (different CAC and aggregation thresholds). It may be easier to hold out on the Kirchner bonds than the Macri bonds (85% threshold for two or more series in aggregate, and two thirds individually, on the former compared to 75% for two or more series in aggregate along with uniformly applicable criteria on the latter). The government may have felt that it needed to offer more on the 2005 Indenture bonds to entice holders to participate, although whether offering 40% more in recovery terms (for example, comparing estimated recovery values for the 2047s in USD and EUR between the two exchanges) is enough, not enough, or too much remains to be seen, as is what this is seen to mean for intra-creditor equity. 

5. Treatment of shorter bonds. Based on deal mechanics and our estimated recovery values, it looks like eligible bonds with front end maturities (2020-2023 bonds) have better treatment than longer ones, given the issuance limits and priorities under the waterfall methodology (and assuming holders of shorter bonds are more likely to opt for the shortest new bond (2030) than one of the longer options). This may be an effective sweetener to encourage holders of short-term bonds to participate, discouraging their holding out (near maturities tend to suffer bigger NPV hits otherwise). 

Estimated recovery values

Our estimated recovery values based on the proposed financial terms are shown in Table 4 below over a range of exit yields. Panel A shows recovery values for new bonds that are eligible to existing holders under the 2016 Indenture. Panel B shows recovery values for new bonds that are eligible to existing holders under the 2005 Indenture. Recovery values are expressed per unit of existing principal for value today.

It is difficult however to give a specific analysis of the value of the swap (from one bond into another) given the menu of options available (which bonds holders can choose will depend on the eligible bond being tendered). The number of permutations is large. But we can make some generalised statements. We think recovery values for the 2005 Indenture bonds (Discounts/Pars) are higher than for those under the 2016 Indenture (see above). For 2016 Indenture bonds, the 2030 bond (the shortest available) looks the most attractive, but this is subject to issuance limits. 

We think holders of Discounts and Pars (2005 Indenture bonds) may see this offer more favourably than holders of 2016 Indenture bonds.

We find it unlikely that holders of 2016 Indenture bonds would accept such an offer, if estimated recovery values are (well) below current prices, depending on the exit yield assumption. However, our estimated recovery values are not so far away from current prices to suggest that a deal is impossible. The problem now is that, presented as a take it or leave it offer, there is little time to sweeten it (unless the government already feels it has enough support to push this through).

At a benchmark 12% exit yield, we calculate recovery values for eligible bonds under the 2016 Indenture range from US$31-36 for the new US$ bonds and EUR27-33 for the new EUR bonds. For the eligible bonds under the 2005 Indenture, recovery values for the Discounts range from US$44-50 for the new US$ bonds and EUR37-42 for the new EUR bonds, while for the Pars, they range from US$31-34 for the new US$ bonds and EUR27-29 for the new EUR bonds, at a 12% exit yield. These compare with indicative (mid) prices in the belly of the curve for 2016 Indenture bonds of cUS$27-28 (2026-28) and cUS$26 at the longer end (2036-48) at the end of last week. Our estimated recovery values may sound neutral to positive (given current secondary market prices), but there must be a big question over what is the appropriate exit yield, especially given the global circumstances.

What is the appropriate exit yield? We illustrate our results using a 12% benchmark rate here, as we have done historically. Weak (but not defaulting) sovereigns (eg B rated) are generally trading at over 1000bp, which could even be seen as consistent with our benchmark rate (eg 1000-1200bp spreads for Belize, El Salvador, Gabon, Ghana, Mozambique, Nigeria). However, current market conditions might suggest this is too low (too optimistic). A 15% exit yield would imply lower recovery values, for instance US$28 on the US$ 2030s (which might still be seen as mildly positive to neutral) and US$23 on the US$ 2036s and 2047s. 

A key consideration for investors in assessing the appropriate exit yield is what post-default (and post-pandemic) Argentina looks like under this Fernandez government in terms of economic fundamentals, the macroeconomic policy framework, prospects for fiscal and debt sustainability, and its commitment (or lack of it) to sound and orthodox policies and structural reforms. Investors see the authorities' policy commitment as lacking given, for instance, the weak fiscal adjustment path that is envisaged, especially without an IMF programme. On the flip side, one might argue Argentina shouldn't be defaulting again for a few years (and election cycles) given it won't have any payments to make for two more years, under these terms, and has low payments for a considerable payment of time thereafter (half a percent on US$60bn is only US$300mn).

And if the offer is rejected, investors may try to take comfort from the fact that any revised terms would have to be better than these, wouldn't they?