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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Argentina exchange offer: Carry on regardless
- The government launched its exchange offer despite objections from bondholders
- Use of exit consents and a new RUFO clause may help encourage participation
- But unless it is modified (which seems unlikely), it risks low participation and ongoing default, so it could get messy
Argentina announced the launch of its exchange offer on Tuesday (21 April), pressing ahead despite the proposal being rejected by its major bondholders. The financial terms are unchanged from those the government announced on Friday (see here). The invitation expires on 8 May (but can be extended, terminated or modified by the government).
It is not clear what happens from here, and we think the situation could get messy. According to local reports, the government accepts the possibility of a partial exchange, which means it could remain in default, a repeat of what happened in 2005.
Given the public rejection by bondholders and lack of meaningful discussions, bondholders may have hoped that the authorities would have either delayed the launch or moved to sweeten the offer, such as by paying accrued interest (which could be worth up to 4pts depending on the bond), or including early consent fees. The government hasn't done this, and carried on regardless, saying it won't improve the offer. The offer clearly states that there will be no payment for any accrued or unpaid interest, although holders may still hope that the government will modify the terms before the offer closes (perhaps if participation is really low, for example).
The four other key features of the offer, set out in the exchange prospectus, are (i) use of collective action clauses (CACs) to effect the exchange, (ii) the use of exit consents, (iii) a Rights Upon Future Offers (RUFO) clause, and (iv) limitation of cross default. Under the existing bonds' CACs, the Proposed Modifications to eligible bonds will be binding on all holders of eligible bonds, whether or not they consented, upon reaching the required thresholds (Requisite Consent), on an aggregated or single series basis, along with meeting certain other conditions. Furthermore, the offer envisages the use of exit consents (Subsequent Modifications) after its completion that, subject to the necessary consents, can be proposed to modify the new bonds and 2016 Indenture bonds (approval requires 75% of the aggregate principal amount); we think this can be used, upon gaining the necessary support, to weaken certain terms of the remaining eligible bonds to reduce their attractiveness, liquidity and legal standing. Regarding the RUFO, under the terms of the new bonds (except for the 2047s USD and EUR), for a period of five years from the expiry of the offer, if the government makes a voluntary offer for any of the untendered eligible bonds, it will have to offer the same terms to holders of the new bonds (investors will recall that the 2005 exchange had something similar). Fourth, the prospectus states that a default on any eligible bond will not result in a cross-default or acceleration on any new bonds. These requirements, individually and taken together, are aimed at encouraging participation, and/or threatening non-participation.
Argentina: Assessment of final restructuring terms
- Offer essentially consists of two exchanges, one for Macri bonds and one for Kirchner bonds
- 10 new bonds; five maturities each in two currencies, with low step-up coupons, and three-year grace period
- Estimated recovery values are not that far away from current prices but there is huge uncertainty over the exit yield
Argentina presented the proposed terms for restructuring its foreign bonds on Friday. The proposal is subject to regulatory approval. The final financial terms are broadly consistent with the partial terms that the government revealed on Thursday (see our flash note here).
The terms of Argentina's debt offer
The offer gives holders of eligible bonds a limited menu of new bonds to choose from, depending on their existing holding. The exchange involves the issuance of 10 new bonds (five in US$, five in euros) and essentially consists of two exchanges, one for the bonds issued in the 2005/2010 exchanges (under the 2005 Indenture; the so-called "Kirchner bonds"), and one for the bonds issued since 2016 (under the 2016 Indenture; the so-called "Macri bonds"). The new bonds are low coupon step-ups with maturities in 2030, 2036, 2039, 2043, and 2047, each one denominated in US$ and EUR. They all have grace periods on any payments for the first three years (2020-2022), with first coupons commencing in November 2022, and long amortisation periods, although the amortisation profile differs by bond (the earliest amortisation payment is in November 2026). Holders of Macri bonds can choose between the 2030, 2036 and 2047 bonds, while holders of the Kirchner bonds can choose between the 2039, 2043 and 2047 bonds. Exchange ratios differ depending on the eligible bond and maturity of the new bond, but are consistent with the minimal principal reduction that had been reported previously. A summary of financial terms is shown in Table 1. Exchange ratios for US$ and EUR bonds are shown in Tables 2 and 3, respectively.
The new 2030 and 2036 bonds are subject to issuance limits, with holders of shorter maturity bonds (US$ 2021-2023, EUR 2020-2023) and 2005 Indenture bonds getting priority in exchanging into these, while holders of certain other eligible bonds (2016 Indenture bonds maturing after 2023) who elect to receive these bonds may receive other bonds in accordance with a "waterfall" methodology that will be published in the invitation material.
There are 21 eligible bonds amounting to a total outstanding of US$66.2bn – 17 Macri bonds (US$41.5bn equivalent) and 4 Kirchner bonds (US$24.7bn equivalent; counting the 2005/10 Discounts in US$ as one, and EUR as one).
Argentina extends debt swap deadline to 2 June – a positive sign
- Government set to miss today's grace period coupon payments
- Extension is shorter than we might have expected
- But this is a positive development if it signals the government is serious about engaging in goodfaith negotiations
This was probably widely expected by now and was our baseline. Rejection of the government's offer, default and continuing of negotiations, with an extended deadline, was our Scenario 3 in our report earlier this week.
And while this is the second extension, the tone seems better now than it previously was. The government's statement announcing the extension said:
"The Republic continues to receive investors’ views and suggestions over different paths to improve recoveries. The Republic is analyzing these suggestions with a view to maximizing investor support while preserving its debt sustainability goals. Argentina firmly believes that a successful debt restructuring will contribute to stabilizing the current economic condition, alleviating the medium and long-term constraints on Argentina’s economy created by its current debt burden and returning the country’s economic trajectory to long term growth. Argentina and its advisors intend to take advantage of this extension to continue discussions and allow investors to continue contributing to a successful debt restructuring."
However, one observation is that time is still tight. Previous restructurings show negotiations can take time, particularly if they involve consideration of state contingent payments, when it comes to ironing out assumptions, details and documentation (the EBG proposal includes a contingent coupon strip). And what happens if the government doesn't agree to such instruments? Does the implied loss of value mean that holders will want to reconsider their proposed bond terms, which could risk further delays?
Still, even if it does take longer to reach a deal, longer than 2 June, we think further extensions can be tolerated by bondholders, while refraining from legal action, if they believe in the government's commitment to goodfaith negotiations and an understanding that a satisfactory agreement is in sight.