Flash Report /
Argentina

Argentina is due to present its bond offer today: How bad will it be?

  • Local reports suggest the terms will be harsh: 50% haircut, four-year grace period, low coupons, etc.

  • If correct, we think they imply recovery values well below current prices

  • We find it very unlikely that bondholders would accept such an offer

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
16 April 2020
Published byTellimer Research

According to local reports, Argentina is due to present its bond offer today (although we can never take anything for granted with Argentina). While we await the details, reports suggest the terms will be harsh. The government may be using the economic crisis caused by Covid-19, the IMF's own analysis and prevailing prices to justify its stance.

We attempt to model the basic reported terms here (and make other assumptions), to see what it implies for the bonds. We stress this is highly illustrative as we await the government's presentation; the official terms could be worse or better than have been reported or rumoured. Reports suggest the principal haircut will be 50% or more, with a four-year grace period on principal and interest (ie no payments until 2024), a low coupon (1% stepping up to 4.5%), with principal repayments from 2025. The intention would be that this is consistent with the IMF's DSA, which said there was virtually no scope for FX debt service payments to private creditors during 2020-24. Given the large bond stock (SEC filings envisage US$51bn in new bonds), the restructuring would have to incorporate multiple new bonds, which gives some scope for nuances, rather than one single mega issue; but we'd assume there would be broad PV equivalence across them all. Whether the offer creates a few very large benchmark issues across the curve, or a more fragmented strip (more, smaller issues) is also unclear. For our purposes, we assume a representative 10-year bond (maturing 2031), with equal semi-annual installments over 2025-31. We model two nominal haircuts, a 50% haircut (ie recovery of 50c per dollar) and a 60% haircut (ie recovery of 40c per dollar). We also assume no past due interest and no capitalised interest during the grace period. So this is a pretty bad offer.

Our estimated recovery values based on these assumptions are shown in the table below over a range of exit yields. Recovery values are expressed per unit of existing principal for value today. Recovery values are sub-25 under a 50% haircut and sub-20 under a 60% haircut, for plausible exit yields (even optimistic ones, given current circumstances). These compare with current indicative (mid) prices in the belly of the curve of cUS$27-28 (2026-28) and cUS$26 at the longer end (2036-48). Yet other reports say the NPV of the offer is c37.5%, although this doesn't say the assumed exit yield and the terms may not be the same as we report above.

We find it very unlikely that bondholders would accept such an offer, if estimated recovery prices are (well) below current prices. It is not clear if such terms are real and, if so, whether they reflect the authorities' discussions with bondholders, if indeed any substantive talks have taken place. It is possible that they do resemble something that bondholders may accept after negotiations. But it might be that Argentina is just doing what it wants to do anyway. Or this may be the government's opening low-ball salvo. Or the reported terms are just wrong. But if they do reflect the government's offer but don't resemble what bondholders have discussed, then we could be in for a lengthy and complex negotiation. Indeed, bondholders may prefer just to wait. 

Illustrative recovery values based on reports on what offer might look like 
Exit yield (%)Recovery value 1Recovery value 2

60% haircut50% haircut
823.429.3
921.727.2
1020.225.2
1118.823.5
1217.521.9
1316.320.4
1415.219.0
1514.217.8
1613.316.6
1712.415.5
1811.614.5
1910.913.6
2010.212.8
Source: Tellimer Research