Argentina's debt exchange: Counter proposals are in, what happens next?
- Bondholder groups submitted their various counter proposals to the government's exchange offer, which closes Friday
- Failure to reach agreement also risks default given expiry of the grace period on missed coupons on the same day
- No agreement and default look likely; the best we can hope for is goodfaith negotiations towards an agreement soon
Bondholder groups submitted their various counter proposals to the Argentine government late on Friday (15 May), in a coordinated response, ahead of the 22 May twin deadline for the government's exchange offer and the expiry of the grace period for US$500mn in missed coupons. While the counter proposals and some softening in the rhetoric from the government's side mark progress, how much depends on the extent of the gap between the two sides and whether it is bridgeable, and time is running out. We think the gap between the government's offer and the bondholders' is large, which we estimate at about 20pts, but it is not unsurmountable, depending on the willingness on both sides to compromise, and from the government's side, finally to engage in goodfaith discussions, although it seems unlikely that this gap can be closed in just the few days that remain.
Still, with little prospect of the government's deal being accepted, and no time to reach a revised agreement by Friday (let alone operationalise or implement it), Argentina could be heading towards yet another default, much of its own making (again), despite what the government and its supporters say. This eventuality would not be much of a surprise to anyone.
So what happens next?
We highlight a few possible scenarios.
1. The government's exchange offer is accepted by bondholders as it is (without modification) so that it doesn't have to make the coupon payments and thereby it can avoid default.
2. The government's exchange offer is rejected (by the majority of bondholders), there is no (or not enough) modification (and we think there isn't enough time to reach agreement on modifying it), so the government makes the coupon payments to avoid default, and it buys more time to negotiate a deal with bondholders (similar to what we saw in the Province of Buenos Aires earlier this year when it ended up paying after creditors rejected its consent solicitation to defer bond payments).
3. The government's exchange offer is rejected, there is no modified deal (not enough time), no payment, but negotiations continue in default amid an informal agreement to refrain from litigation, perhaps with the government extending the deadline again.
4. No deal, no payment, but negotiations continue under a standstill agreement (although this is in the wrong order of doing things and seems like closing the stable door after the horse has bolted).
5. No deal, no payment, no negotiations.
The counter proposals
Generally, the counter proposals envisage removing the three-year grace period on payments and having a higher and faster coupon step-up. There is no (or virtually none) principal haircut in any of the proposals. Accrued is paid in cash. The Bondholder Group proposes a strip (we think similar to Greece and Ukraine), with holders receiving an equally weighted portfolio of bonds with amortisations from 2027-2040, one in US$ and one in EUR. Payments resume in November 2020, with the coupon starting at 1.25%, rising to 5.875% in November 2025, for the US$ bonds. The Ad Hoc Bondholder Group is closer in structure to the government's proposal with a menu of bonds, six each in US$ and EUR (with the addition of a new shorter 2027 bond). Amortisations begin from 2025. Payments resume in November 2020, with the coupon starting at 2.25% over 2020-2022 for the US$ bonds, but this is fully capitalised in year 1, partially capitalised in year 2, and paid in cash from year 3 onwards, with the coupon rising thereafter depending on the specific bond (rising to 3.75% on the shortest 2027 bond and as high as 6.95% on the 2039 bond). For the 2005 indenture bonds, the Exchange Bondholder Group proposes two new bonds, one maturing in 2033 (amortising from 2027) and one in 2040 (amortising from 2034). Payments resume in November 2020, with the coupon on the shorter bond rising from 1.25% to 5.875% from 2023 and from 1.25% to 5.875% from 2025 for the longer bond. Additional cash payments or sweeteners linked to GDP are also proposed (perhaps to compensate for giving up their stronger legal protections compared to the 2016 indenture bonds, although it is not clear if they apply to both classes of bonds). However, it is not clear to us if these are state contingent coupon uplifts or detachable instruments.
Figure 1: Price of ARGENT 5.875% 2028 (US$)
Source: Bloomberg, Tellimer Research
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