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 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.
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