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. However, we think this is unlikely.
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.
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.
Valuing the counter proposals
Our estimated recovery values based on our understanding of one of the proposals (for simplicity) according to media reports, the Bondholder Group's, are shown in Table 1 (excluding cash payments and additional sweeteners or recovery rights). We note, however, that modelling of the proposals is difficult given limited information, so we should exercise some caution in interpreting the results. The NPV of the offers have been reported in the media as being in the range US$58-60 (at a 10% exit yield).
We estimate a PV of US$63 for the strip (ie average across all the instruments) at a 10% exit yield for US$ bonds. This compares to our estimated recovery values under the government's proposal of c40 for US$ bonds under the 2016 Indenture at the same exit yield. That suggests a gap of about 20pts between the two sides. However, we also think a 10% exit yield is generous for Argentina not only in the current environment but also for a government in which we really have very little visibility – and confidence – in their macro policy framework, track record and reform commitment, especially in the absence of an IMF programme. At a still generous 12% exit yield, our estimated recovery value falls to US$54 compared to c31-36 in the government's proposal (albeit still a wide gap). The current environment may even justify a higher exit yield (say 14%), although conversely, one could argue that post-deal, with Argentina set to pay very little in the first few years, that should mean a lower probability of default and justify a much lower exit yield.
Our estimated recovery values compare to current prices of c40 at the front-end (2021-2023), c33 in the belly and c31 at the long-end for Macri bonds, and 42 for the US$ discounts (Table 2). As such, the proposal offers some 20-30pts upside for those with an aggressive view on exit yields and still some 15-20pts under a less aggressive view, with the longer lower cash price bonds offering the most upside. This may sound like a Buy signal, although we suspect there is still some way to go, and plenty of deal risk, and scope for compromise to reduce the gap between the two sides and which could reduce estimated recovery values.
The bonds have already rallied in the last few weeks (with the 5.875% 2028s up 35% for instance, see Figure 1) perhaps as confidence grew that a robust and well coordinated group of creditors may be able to extract better terms and amid perceptions that the government's own stance may have softened after saying it was open to offers following the failure of its own debt swap on its original 8 May deadline.
Read the full report here.
Recap of the week’s key credit developments
Sri Lanka (SRILAN): On Wednesday, S&P downgraded its long-term foreign currency rating for Sri Lanka to B- from B. The outlook on the B rating was changed to negative in January due to fiscal and debt sustainability concerns from new tax cuts. The rating downgrade comes as the country’s fiscal position worsens. S&P said that the economy could go into recession this year, rather than the previously expected rebound, further worsening the fiscal position. The coronavirus pandemic has also increased external financing risks. The agency now expects the fiscal deficit this year to be 8% of GDP, from 6.8% in 2019, as the pandemic reduces government revenues to below 10% of GDP. Fitch downgraded Sri Lanka to B- (negative outlook) on 24 April, citing public and external debt challenges, while Moody’s B2 rating was placed under review on 17 April. The outlook on the S&P rating is now stable.
Maldives (MVMOFB): On Thursday, Moody’s downgraded its long-term foreign currency rating for Maldives to B3 from B2, and maintained the negative outlook. Fitch rates the country B, with a negative outlook since 30 March. The key reason cited by Moody’s for the downgrade was the impact on economic activity and government liquidity due to the coronavirus pandemic, specifically the tourism sector (which accounts for nearly 60% of GDP). Fiscal and external positions are expected to weaken further, and macroeconomic stability will persist due to limited policy effectiveness and financial buffers. This will cause a deterioration in credit metrics. The continued negative outlook reflects further downside risks, such as longer or more severe economic contraction. There are also limited financing options and Maldives faces a large bond maturity in 2022 (amounting to US$250mn, with another US$100mn bond maturing in 2023). The agency now projects that the debt burden will rise to over 75% of GDP by 2020-21, from 60% at end-2019. Moody’s statement noted while not its current expectation, indications that Maldives will participate in debt relief initiatives (such as DSSI) would be negative for the rating.
Global policy response: Central banks have continued economic stimulus to support their economies amid the coronavirus pandemic. This week, these include:
- Pakistan: On Friday, the State Bank of Pakistan cut its policy rate by 100bps to 8%. This is the fourth rate cut this year and takes total 2020 cuts to 525bps. The MPC believes that the inflation outlook has improved following recent cuts to domestic fuel prices, while coronavirus challenges continue.
- Iceland: On Wednesday, the Central Bank of Iceland cut its key rate by 75bps to 1%, for the fourth time this year. The MPC statement cited the Bank’s latest forecasts of an 8% contraction in GDP this year as tourism sharply slows.
- Thailand: Also on Wednesday, the Bank of Thailand cut its repo rate by 25bps to 0.5%, saying that the economic contraction this year was now expected to be greater than previously thought. This comes as the global economy slows, and tourism and exports fall.
- Indonesia: Bank Indonesia decided on Wednesday to hold its key interest rate to support the currency. The 7-day reverse repurchase rate remains at 4.5%. The governor did say that the inflation environment would allow for lower rates going forward, as there is a need to encourage economic activity. There have been two 25bps cuts already this year, on 20 February and 19 March.
- Turkey: The Central Bank of the Republic of Turkey (CBRT) decided to cut interest rates by 50bps on Thursday, the ninth consecutive cut, which brings the one-week repo rate to 8.25%. Economists have suggested this comes as confidence in the lira has improved.
New issuance: This week, a number of sovereign issuers have priced bond deals as issuers take advantage of lower global yields and more stable market conditions, including:
- Romania: On Wednesday, Romania (Baa3/BBB-/BBB-) priced a dual tranche bond offering, comprising a EUR1.3bn bond with a 2.75% coupon, maturing on 26 February 2026 priced at 2.793%, and a EUR2bn bond with a 3.624% coupon maturing on 26 May 2030 priced at par.
- Abu Dhabi (UAE): Also on Wednesday, Abu Dhabi (Aa2/AA/AA) priced a three-part bond offering. This included a US$1bn bond with a 2.5% coupon maturing 16 April 2025 priced to yield 1.692%, a US$1bn bond with a 3.125% coupon maturing 16 April 2030 priced to yield 2.203% and a US$1bn bond with a 3.875% coupon maturing 16 April 2050 priced to yield 3.25%.
- Egypt: On Thursday, Egypt will also price a three-part bond offering, comprising a four year, 12 year and 30 year tranche. Initial price talks have ranged from around 6.25% to 9.375%, according to Bloomberg.
Nostrum oil (NOGLN) hosted a conference call for Q1 20 results, the period in which the full effect of lower oil prices was not yet visible. However, a combination of a 28% yoy decline in sales volumes and a 19% yoy decrease in the oil price caused revenues to fall 37% yoy to US$60mn. EBITDA was down 46% yoy at US$32mn and net leverage increased to 6.1x. The company’s cash reserves dropped to US$66mn as operating cash flows could not fully cover interest payments on the bonds. None of this came as a surprise. Even with the recent rally in oil, the prices are still too low for Nostrum to breakeven on a free cash flow basis amid declining production and suspended capex. We think it is quite likely that the next coupons on US$725mn notes due 2022 and US$400mn notes due 2025 will not be paid in Q3 20 as management may choose to default sooner and preserve cash. Having said that, a valuable yet massively underutilised asset – the brand-new gas treatment facility (GTU3) – provides the foundation for a value accretive debt restructuring if the company succeeds in its strategic shift into midstream. We have a Hold recommendation on NOGLN 22s and 25s, both indicated at a mid-price of c24, according to Bloomberg.
ShaMaran Petroleum (SNMCN) bondholders formed a committee following the company’s announcement that it was facing liquidity problems and was exploring options in relation to the scheduled US$15mn bond amortisation and US$11mn interest payment, both due by July 2020. The committee currently has seven members that together hold more than 50% of the outstanding US$190mn 12% notes due 2023. ShaMaran has a 26.7% stake in Atrush PSC, operated by Taqa. The collapse in oil prices and the KRG delaying payments for November 2019-February 2020 invoices at least until the year-end have undermined the company’s liquidity. Despite vigorous cost cutting, we expect ShaMaran to continue experiencing tight liquidity as it now fully relies on timely payments from the KRG. In addition, we estimate that even before interest (cUS$22mn a year) and capex (US$8mn in 2020), ShaMaran needs Brent to be at least at US$30/bbl to cover opex and G&A. We have a Sell recommendation on the bonds.
Global Ports Holding (GLYHO) disclosed that Nassau Cruise Port (NCP) raised US$130mn through a private bond offering. In 2019, Global Ports, a Turkish cruise and commercial port operator, acquired 49% in a concession agreement of Nassau Port, which came with a US$160mn capex commitment to be invested over two years from June 2020. NCP’s recent debt transaction lifts short-term liquidity concerns for Global Ports, but does not address the uncertainty around reopening of cruise ports in the Mediterranean and the Caribbean and recovery of commercial ports, which have seen throughput volumes decline on the back of the Covid-19 outbreak. The company had US$54mn at the end of Q1 20, which should be enough to help it through 2020. However, if by the start of 2021 cruise ports remain close and commercial port performance is not strong, the company will probably have to restructure the US$250mn 8.125% notes due 2021. These risks are already reflected in GLYHO 21 prices indicated at 57, according to Bloomberg. We have a Hold recommendation on the bonds.