Flash Report / Argentina

Argentina extends debt swap deadline to 2 June – a positive sign

  • Government set to miss today's grace period coupon payments
  • Extension is shorter than we might have expected
  • But this is a positive development if it signals the government is serious about engaging in goodfaith negotiations
Argentina extends debt swap deadline to 2 June – a positive sign
Argentina has extended the deadline for its exchange offer again, this time to 2 June, according to a statement overnight by the ministry of finance. The country is also expected to miss US$500mn in bond payments due today as the grace period for payment expires. 
 

This was probably widely expected by now and was our baseline. Rejection of the government's offer, default and continuing of negotiations, with an extended deadline, was our Scenario 3 in our report earlier this week. 

 
But the extension is shorter than we might have expected (2 June is only just over a week away). Local talk yesterday was that the deadline would be extended to end-June, although we thought something even longer than that might be needed. But unlike its previous extension, such a short extension could be a positive sign if it signals the government is serious about engaging in goodfaith negotiations and believes there is enough there in the counter proposals to reach a deal quickly, rather than drag it out for longer. Investors might see that as meaning recovery values will be closer to 60 than 40, but that's not clear yet. A positive sign that is, unless Argentina has misjudged the situation again.


And while this is the second extension, the tone seems better now than it previously was. The government's statement announcing the extension said: 

"The Republic continues to receive investors’ views and suggestions over different paths to improve recoveries. The Republic is analyzing these suggestions with a view to maximizing investor support while preserving its debt sustainability goals. Argentina firmly believes that a successful debt restructuring will contribute to stabilizing the current economic condition, alleviating the medium and long-term constraints on Argentina’s economy created by its current debt burden and returning the country’s economic trajectory to long term growth. Argentina and its advisors intend to take advantage of this extension to continue discussions and allow investors to continue contributing to a successful debt restructuring."

However, one observation is that time is still tight. Previous restructurings show negotiations can take time, particularly if they involve consideration of state contingent payments, when it comes to ironing out assumptions, details and documentation (the EBG proposal includes a contingent coupon strip). And what happens if the government doesn't agree to such instruments? Does the implied loss of value mean that holders will want to reconsider their proposed bond terms, which could risk further delays? 

Still, even if it does take longer to reach a deal, longer than 2 June, we think further extensions can be tolerated by bondholders, while refraining from legal action, if they believe in the government's commitment to goodfaith negotiations and an understanding that a satisfactory agreement is in sight. 


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