Sovereign Analysis /

Argentina exchange offer: Carry on regardless

  • The government launched its exchange offer despite objections from bondholders

  • Use of exit consents and a new RUFO clause may help encourage participation

  • But unless it is modified (which seems unlikely), it risks low participation and ongoing default, so it could get messy

Argentina exchange offer: Carry on regardless
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
23 April 2020
Published byTellimer Research

Argentina announced the launch of its exchange offer on Tuesday (21 April), pressing ahead despite the proposal being rejected by its major bondholders. The financial terms are unchanged from those the government announced on Friday (see here). The invitation expires on 8 May (but can be extended, terminated or modified by the government). 

It is not clear what happens from here, and we think the situation could get messy. According to local reports, the government accepts the possibility of a partial exchange, which means it could remain in default, a repeat of what happened in 2005. 

Given the public rejection by bondholders and lack of meaningful discussions, bondholders may have hoped that the authorities would have either delayed the launch or moved to sweeten the offer, such as by paying accrued interest (which could be worth up to 4pts depending on the bond), or including early consent fees. The government hasn't done this, and carried on regardless, saying it won't improve the offer. The offer clearly states that there will be no payment for any accrued or unpaid interest, although holders may still hope that the government will modify the terms before the offer closes (perhaps if participation is really low, for example).

The four other key features of the offer, set out in the exchange prospectus, are (i) use of collective action clauses (CACs) to effect the exchange, (ii) the use of exit consents, (iii) a Rights Upon Future Offers (RUFO) clause, and (iv) limitation of cross default. Under the existing bonds' CACs, the Proposed Modifications to eligible bonds will be binding on all holders of eligible bonds, whether or not they consented, upon reaching the required thresholds (Requisite Consent), on an aggregated or single series basis, along with meeting certain other conditions. Furthermore, the offer envisages the use of exit consents (Subsequent Modifications) after its completion that, subject to the necessary consents, can be proposed to modify the new bonds and 2016 Indenture bonds (approval requires 75% of the aggregate principal amount); we think this can be used, upon gaining the necessary support, to weaken certain terms of the remaining eligible bonds to reduce their attractiveness, liquidity and legal standing. Regarding the RUFO, under the terms of the new bonds (except for the 2047s USD and EUR), for a period of five years from the expiry of the offer, if the government makes a voluntary offer for any of the untendered eligible bonds, it will have to offer the same terms to holders of the new bonds (investors will recall that the 2005 exchange had something similar). Fourth, the prospectus states that a default on any eligible bond will not result in a cross-default or acceleration on any new bonds. These requirements, individually and taken together, are aimed at encouraging participation, and/or threatening non-participation.

Crucially, rather than delay the offer because of bondholder objections, the government is pressing ahead with the exchange anyway. Ordinarily, given the presence of CACs in the existing bonds, one might have expected the authorities to proceed only if they were reasonably assured of achieving the necessary thresholds (and only presenting an offer that they thought would do this). However, Argentina seems intent on undertaking the exchange, irrespective of participation, and maybe modifying the terms, or keeping it open for a bit longer, possibly hoping that others come in, until they build a critical mass to force all untendered holders into the new bonds through the CACs and threaten remaining holdouts with subordination through exit consents. The government seems to accept the result may be a partial exchange, without a (publicly stated) minimum participation threshold. 

The launch also comes as the government enters the 30-day grace period for the bonds whose coupons were due on 22 April and which went unpaid. This is probably not a coincidence; as we've noted before, the government may be hoping it can use the grace period to close the exchange, and thereby avoid default, or upon low participation, blame foreign bondholders for it ("we didn't want to default", as we've heard before). We presume Argentina has no intention of servicing the eligible bonds that remain after this exchange. 

This implies, as an echo of 2005, with low participation and until Argentina can achieve the necessary thresholds, it will remain in default, and have a restricted default rating, with two distinct groups of bonds – again (performing and non-performing, new and old, exchanged and untendered). Recall that the 2005 exchange had an initial acceptance of 75% from foreign bondholders (and 76% overall). We're not sure they will even get 50% now. But what happens if they only get 10%? That may look embarrassing. Will they still go ahead and complete the exchange? Or will the government accept the low level of participation and seek to use the time that arises after falling into default to devise new terms, enacting another exchange, and use the RUFO to swallow up the new bonds in a subsequent offer? 

The other corollary is what a continuing default means for an IMF programme. To be clear, the exchange prospectus states that the authorities have indicated their intention to seek a new IMF programme. The authorities would need a high level of participation to secure one. But even if the government is serious about wanting one (and we note this intention suffers from time inconsistency), a continuing and substantial default on private sector claims could be a barrier to a programme under the Fund's lending into arrears policy. The Fund can overlook a default if it sees there are goodfaith debtor-creditor negotiations, but we think it would be hard to assert goodfaith here in the face of a rejected unilateral offer (low participation) and no further meaningful discussions. That said, the IMF MD – ahead of the launch of the offer – has already described Argentina as acting in goodfaith (much to the chagrin of bondholders), so perhaps it wouldn't be a barrier after all. It would just be embarrassing for the Fund and set a dangerous precedent. 

For convenience, we summarise below our estimated returns from the exchange in terms of NPV gains or losses from exchanging existing bonds into the new bonds, with recovery values (PVs of new bonds) assessed over a range of exit yields (see Table 1, panel A and panel B). Existing bonds can be exchanged into new bonds according to the menu of exchange options, as indicated. 

Table 1: Estimated NPV gains or losses given exchange terms 
Panel A: USD 
Eligible bond
Clean price
New bond% gain/loss for new bond at different exit yield (%)

6.875% 202130.65203036%17%1%


5.625% 202230.18203038%19%3%


4.625% 202330.03203039%20%3%


7.5% 202628.84203045%24%8%


6.875% 202728.07203049%28%10%


5.875% 202827.96203049%28%11%


6.625% 202828.10203048%28%10%


7.125% 203627.13203054%32%14%


7.625% 204627.77203640%13%-8%

6.875% 204827.09203644%16%-6%

7.125% 211726.97203644%16%-6%




Panel B: EUR 
Eligible bond
Clean priceNew bond% gain/loss for new bond at different exit yield (%)

3.875% 202228.82203032%14%-2%


3.375% 202328.26203035%16%0%


5.0% 202726.67203043%23%6%


5.25% 202826.31203045%25%8%


6.25% 204726.83203625%0%-20%




Source: Tellimer Research. Indicative mid price on Bloomberg as of 23 April.