- Government extends consent solicitation deadline to 11 June as it seeks support for coupon deferral
- Request to bondholders comes as government is seeking a debt restructuring
- Hard default looks likely as bondholders say the cannot support consent solicitation; retain Hold
The government announced on 1 June the extension of the consent solicitation that it launched on 19 May. The consent solicitation was due to expire on 1 June; the new deadline is now 11 June. An extension is no real surprise, and something we had anticipated in our previous commentary, although there is still no guarantee that the consent solicitation will be accepted by the revised deadline either, which raises the prospect of a hard default by 19 June.
However, although the original timetable was perhaps too tight, it's not really a question of time. Rather, it's about the government's approach, following the presentation of its proposed restructuring terms on 4 May. According to media reports, a group of bondholders announced on 2 June that they will not support the consent solicitation after the government rejected their proposal for private discussions under an NDA. Bondholders argue the government is not willing to open restructuring negotiations or to consider a counter proposal.
Recall, the consent solicitation seeks to extend the grace period on the 20 May coupon, which the government missed, to 19 September. Otherwise, the scheduled 30-day grace period is due to end on 19 June. The effect is that the amended grace period will then take in the grace period of the next coupon due on 20 August, such that they expire on the same date; so in essence, the government is asking formally to defer two coupon payments.
In addition to the extension to the deadline, the government also issued a Supplement, which seeks to clarify the aggregate principal amount of the bonds currently outstanding and confirms that the effect of the grace period extension would be to extend the earliest date that a principal restatement, if any, were to occur in respect of the 20 May 2021 coupon payment to 19 October 2021.
But the clock is ticking. As we noted previously, if there is insufficient support from bondholders, the deadline can be extended again and again until either there is agreement or the 30-day grace period expires, whichever is sooner.
If there is no agreement, and the consent solicitation is rejected, the government will then face a choice between either paying the May coupon at the end of the 30-day grace period in order to avoid default – although the spotlight would then fall on what happens to the August coupon (perhaps the government will seek another consent solicitation by then, or may have made more progress on restructuring) – or it will default anyway. Given the mood music so far, we think a hard (payment) default looks more likely than paying if the consent solicitation is rejected.
The bonds have remained relatively unchanged on the news, suggesting that holders had largely discounted an extension (and rejection by bondholders), with latest prices hovering around cUS$41 on Bloomberg (indicative mid-price basis). We calculate the government's offer is worth about US$30 in PV terms, expressed per unit of existing principal, at a 12% exit yield.
We retain our Hold.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...