Flash Fixed Income Report /
Argentina

Stoneway's problems continue to mount; reiterate Sell

  • The Siemens dispute and Stoneway's notification to defer payments and perhaps exchange bonds are possible default signs

  • Our concerns around the company's medium-term viability reinforce our Sell recommendation

  • Company at risk of ceasing to be a going concern – bonds could go to the 20s.

Rafael Elias
Rafael Elias

Director, Latin America Credit

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Tellimer Research
27 February 2020
Published byTellimer Research

Stoneway's problems continue to mount.

We believe that the two factors affecting the company – the dispute with Siemens, which in our view takes prevalence over the interests of bondholders, and the intent to exchange the existing bonds for new instruments that would likely have longer maturities, lower amortisations and lower coupons – could be the first signs of a possible default by Stoneway on its bond obligations.

Moreover, the company's poor communication with the markets (particularly on anything related to the Siemens dispute) has led to deeper doubts among investors regarding the viability of the company and its ability to meet its obligations even under the proposed rescheduling and potential exchange.

We reiterate our Sell recommendation on Stoneway's US$588.912mn (of an original amount of US$665mn) 10% senior secured (1st lien) bonds due 2027 (Caa3/NR/C). The bonds trade at cUS$48.658 (ALLQ) to yield c38.02% (g-spread 3,698bps; z-spread 4,771bps).

We believe that current levels, as low as they may seem, do not accurately reflect the real risk that the company could cease to be a going concern. Our view is that, if CAMMESA continues to delay its payments to the company and if Siemens wins its case in arbitration, the bonds could decline to the 20s.

The details:

On 7 February, an "Order to Show Cause for an Order of Attachment and Temporary Restraining Order in Aid of Arbitration" was issued by the US District Court, Southern District of New York, based on Siemens Energy Inc.'s Memorandum of Law in support of such a motion.

On 13 February, Stoneway Capital Corporation announced a Consent Solicitation that, among other things, states that:

"The Solicitation seeks the consents (the “Consents”) of holders of the Notes (“Noteholders”) to (i) certain proposed amendments (the “Proposed Indenture Amendments”) to the amended and restated indenture, dated as of 9 November, 2017, governing the Notes (as amended, the “Indenture”), (ii) certain proposed amendments (the “Proposed Depositary Agreement Amendments” and, together with the Proposed Indenture Amendments, the “Proposed Amendments”) to the second amended and restated depositary agreement, dated as of 9 November, 2017 (as amended, the “Depositary Agreement”), and (iii) receive New Temporary Consenting Holder Global Notes with new CUSIP/ISIN numbers."

According to the Consent Solicitation:

"The Proposed Indenture Amendments will provide that (i) notwithstanding anything to the contrary in the Principal Payment Schedule set forth in Section 1 of the reverse of the existing Global Notes, the payment of that portion of the US$27,808,970 of principal in respect of the Notes that is due and payable on March 1, 2020 (such payment, the “March 1, 2020 Amortization Amount”; and such date, the “Original Principal Payment Date”) that is attributable to the Notes held by Consenting Noteholders shall be deferred from March 2, 2020 until September 1, 2020 (the “Deferred Principal Payment Date;”

In addition, the Consent Solicitation states that:

To the extent that the Issuer has Excess Cash on March 31, 2020 and June 30, 2020 (each, an “Excess Cash Determination Date”), the Issuer shall use 100% of such Excess Cash to offer to purchase (each such offer, an “Excess Cash Offer to Purchase”), on a pro rata basis, all or a portion of the Notes held by Noteholders holding Temporary Consenting Holder Global Notes at a price equal to 100% of the principal amount thereof up to a maximum aggregate amount not to exceed the Deferred Amortization Amount, plus Additional Amounts, plus accrued and unpaid interest to but not including the Purchase Date."

The reason given by the company to issue this Consent Solicitation is also stated in the document as follows:

"The Company is carrying out the Solicitation in order to provide financial flexibility to develop and implement through a consensual process a comprehensive recapitalization plan, including but not limited to through an offer to exchange the Notes for new senior secured debt securities having an interest rate, tenor, amortization structure and other terms that better align the Company’s obligations under such indebtedness with the current and anticipated receipt of payments pursuant to its power purchase agreements with CAMMESA, against the backdrop of the currently prevailing political and economic environment in Argentina."