Fixed Income Analysis /

Province of Buenos Aires: Thoughts on approach to restructuring

    Stuart Culverhouse
    Stuart Culverhouse

    Chief Economist & Head of Fixed Income Research

    Tellimer Research
    17 January 2020
    Published byTellimer Research

    The Province of Buenos Aires (BUENOS) launched a consent solicitation on 14 January seeking to extend the forthcoming principal repayment of its 10.875% notes due 2021, which is otherwise due on 26 January 2020. The second of the bonds’ three annual principal repayments, amounting to US$250mn, is due; this will leave only US$250mn remaining next year. An interest of US$27mn is also due.

    However, faced with cashflow constraints, as previously warned by the new Governor Axel Kicillof in December, the province is seeking consent to defer the repayment to 1 May. The proposed amendment requires the support of 75% or more of holders under the bonds’ collective action clause (CAC). The deadline for consent solicitation is 22 January (5pm, Central European Time).

    The news came after stories had circulated only last week that suggested the Federal Government was ready to provide financial assistance to the province, but which was later denied by Finance Minister Guzman over the weekend. Still, holders had been preparing for the worst, with the announcement on 12 December of the formation of a negotiating group of creditors (see our Credit Weekly on 19 December).

    We think it was always unlikely that any kind of agreement with creditors would be reached in time, ahead of the scheduled repayment date, so the consent solicitation – if approved – buys more time for negotiations to continue and to reach agreement on a restructuring plan. If not approved, the province could still either pay on due date, or within the 10-day grace period for principal (as reported in the media), although it says it doesn’t have the money, or use the grace period to hope to reach an agreement (and assuming holders don’t accelerate).

    However, timing would still be tight even then and we’d expect the rejection of the consent solicitation would be viewed by the province as a hardening of positions, which could even prompt them into a hard default. Even if approved, it does not seem likely that the province will have found the money by May, suggesting some kind of restructuring is inevitable. And the province faces another amortisation on its US$-denominated international bonds in June, this time the first US$450mn principal repayment of its 9.95% notes due 2021 (following some US$116mn equivalent of its 2020 bonds in May). But we think this raises wider considerations for holders.

    First, we wonder if provincial holders will be willing to accept a restructuring ahead of the sovereign restructuring (ie as the province’s fortunes are so closely tied to the sovereign, will it be better to wait to see what the overall macro situation looks like?). Principal deferment through the consent solicitation could better align these timelines. However, despite what the government says (aiming to resolve debt issues by the end of March), we doubt the sovereign restructuring will be concluded before June anyway. Does this imply another extension in May then? Moreover, the way provincial holders are treated may send important signals as to the treatment of sovereign bondholders (and vice versa).

    Second, can the province successfully target one bond in isolation of the rest, efficiently and cost effectively? The province has quite a big bond stock, some US$7.4bn in principal outstanding across 11 bonds. We think it is unusual – but not entirely unprecedented – in situations where multiple bonds exist to restructure one bond in a period of distress and leave the rest untouched. A counter example might be the PDVSA bond swap in 2016 (although that involved an exchange of two bonds). But that experience suggests the necessary inducements to encourage participation can be expensive (in that case, CITGO collateral) and the risk of the operation being viewed as a distressed exchange by rating agencies could have wider consequences (especially if the alternative is default, as appears to be the case with PBA).

    Hence, does the province need to think about a comprehensive restructuring instead of a piecemeal approach? That remains to be seen. The 10.875% notes due 2021 closed at 58.5 on 15 January (indicative mid-price on Bloomberg), down from 70.7 on 10 January, albeit up from its sub-50 handle in November.

    This report was first published in our Weekly Credit Risk Monitor, 16 January.