The government's restructuring timetable published last night may look like a Buy signal for the US$ bonds, for the only way it will be met, in our view, is through a very favourable deal for bondholders; however, this is not necessarily the government's narrative.
The timetable envisages:
- The process starting next week, with requests for proposals (RFPs) for bank and information agents;
- Economy Minister Martin Guzman presenting the guidelines for debt sustainability in mid-February;
- Bondholder meetings in the second half of February in a 10-day consultation period;
- The launch of the debt offer in the second week of March; and
- Closing by end-March.
However, this seems ambitious to us. It may also be unrealistic, ill-considered and lacking credibility. The speed would also seem unprecedented in our view for a sovereign restructuring rather than something more akin to a voluntary debt swap. Ukraine (2015) for instance (which ended up as a good deal for bondholders, with a strong committee, but over a much smaller bond stock) still took the best part of five months (from the government's presentation on the perimeter of the restructuring in April that year), and an IMF programme was already in place.
We also see some potential problems with what this timetable might mean. First, while bondholders will no doubt be happy to see a favourable deal (anything which offers recovery values reasonably above current prices), if it is seen domestically as caving in to foreigners, this may risk the Alberto Fernandez government's political capital at home.
Second, of more importance for bondholders, it is not clear to us what it means for IMF involvement. Although the timetable incorporates the IMF technical mission in February (12-14), it does not seem to allow much more time for agreement on, and IMF Board approval of, an IMF programme (assuming the authorities want one, which we still do not know – we infer, from this timetable, that either they do not or the government has completely misjudged how this works).
And here is the conundrum – if the government is prepared to go it alone, without the IMF, that may help speed up the process, but we suspect many bondholders will be sceptical over the government's policy commitment, which could influence the nature of the deal, exit-yield assumptions or how the bonds trade after it.
In particular, we worry that a favourable deal for bondholders now, without an IMF programme (ie weak policy commitment and discipline) will just store up problems for later on and require another (deeper) restructure in a few years' time. Or the government wants the IMF, and so do bondholders (for the policy discipline as well as the money), but we think this will take longer than March. In particular, it may – from the IMF's perspective – be putting the cart before the horse if the government requests an IMF programme but reaches a debt restructuring before the IMF have done their own debt-sustainability analysis (DSA).
We also make other observations. First, one unusual feature in our view is that it states the government will set out its guidelines for debt sustainability, and presumably restructuring, before it appoints its financial advisors. Guzman has already set out some guidelines (debt reduction, coupon reduction, maturity extension).
We also think 10 days of creditor talks is not long, especially on such a large debt stock, and one which is not all legally homogeneous (different aggregation clauses on the two 'classes' of bonds; Kirchner bonds (2005/2010) and Marci bonds), and where the policy framework is still missing. Moreover, bondholders are arguably still fragmented (we are aware of at least four bondholder groups), although they might come together now a process is taking shape. Experience suggests a strong and well coordinated creditor committee will have a better chance at extracting better terms (a la Ukraine 2015 or Mozambique 2018-19).
There are of course some understandable reasons for reaching a quick deal, which might motivate the ambitious timetable, and ergo, point towards a bondholder-friendly deal (and maybe the government/holders/IMF know something we do not about how quickly this can be done):
- Only after sorting out the debt can the government – and economy – really move on, and President Fernandez will want to show some quick gains to maintain his popularity (and show gains ahead of the mid-terms); and
- A quick sovereign restructuring can help clear the path for the Province of Buenos Aires restructuring (and other provinces if necessary), removing investor fears that might arise if the Province 'goes first' and sets a (bad) precedent for the sovereign (the tail wagging the dog). For what it is worth, we think the Province should just say explicitly "let's wait for the sovereign" (if it really does not have the money for the 2021 instalment that was due in January and is now subject to a request for consent solicitation to extend the maturity to 1 May), and hope that bondholders do not accelerate, and may gain more credibility from doing so.
- A debt distress/default label is a barrier to attracting foreign capital, so the sooner the government can normalise its debt, the sooner it might be able to attract foreign investment.
We retain our Hold rating on Argentina's sovereign bonds.
Figure 1: Price of ARGENT 6.625% 2028 US$ bond