BA province folds and pays debt in full at the last minute

6th February 2020

By Ignacio Portes

BA province folds and pays debt in full at the last minute

Debt renegotiations can be a lot like some card games. Is the debtor urged to reach an agreement? Are creditors willing to give up some ground in order to not risk losing it all? Who has more to lose in case of a default? And who is holding the higher card?

</p> <p>When it comes to this country, the game is not a simple one. Argentina’s federal government has <a href="">partially defaulted</a> on its <a href="">local debt</a>, but both the Mauricio Macri and Alberto Fernández administrations have tried to avoid a new default on the international arena. The countries’ provinces have not defaulted yet, but some of them are <a href="">struggling financially</a>.</p> <p>Enter <a href="">Buenos Aires province</a>. The country’s largest district has seen its debt steadily increase throughout the last decade. When Peronism reclaimed the province in 2019, Governor Axel Kicillof said it would not be able to pay the debt on its current terms, but didn’t want to default either.</p> <h2><strong>A last minute surprise</strong></h2> <p>As an alternative, Kicillof launched an against-the-clock proposal last month offering to pay only the interests of its coming debt maturity for the BP21 Buenos Aires province bond, while postponing capital payments. But the Governor needed 75% of bondholders to accept his proposal before January 26 (with a 10-day deadline extension at maximum) in order to avoid a default, according to the bond’s prospectus. A tall task, given that bonds were scattered across hundreds of firms and individuals across the globe.</p> <p>As the first deadline passed with no agreement, the province extended negotiations to the very limit, putting off its final deadline four times during the 10-day grace period, up to the morning of the last contractually-acceptable date, on February 4.</p> <p>But in the end, Kicillof <a href="">folded</a>.</p> <p>Instead of paying only USD 27 million in interest and postponing USD 250 in capital, as Kicillof had initially proposed, the province ended up depositing the USD 277 million in full. Not even an <a href="">intermediate proposal on February 3</a>, offering to pay 30 percent of capital as well, was enough to get 75 percent of bondholders on Kicillof’s side, and the pressure not to default in the middle of the larger national debt renegotiation forced the governor into doing what he had initially described as impossible.</p> <h2><strong>Market reaction</strong></h2> <p>It is fair to say that <a href="">Kicillof</a> does not hold a positive image among market participants and analysts. Since his time as Cristina Fernández de Kirchner’s Economy Minister, Kicillof’s clashes with economic establishment figures and professional commentators have been too long to list, making him quite popular among the former president’s base but strongly questioned elsewhere.</p> <p>This time, his back and forth was frequently described as amateurish or unnecessary, although ultimately better than the alternative of defaulting.</p> <p>“The incentives were clear. Neither the Nation, nor Buenos Aires Province or the rest of the districts waiting to restructure the debt would have been happy with a premature default triggered by a relatively small maturity, for which Buenos Aires province had enough funds,” the Elypsis consultancy agency said. “The failed negotiations added unnecessary noise but we believe the final decision confirmed our opinion that the national government is convinced about the convenience of securing a rapid restructuring that avoids any defaults.”</p> <p>According to the EcoGo consultancy agency, meanwhile, Kicillof’s chicken game was based on an incorrect premise: that the investors holding his provincial bonds would end up folding first because a default would damage them as well. “When the fund you are up against is holding bonds that merely represent 0.003 percent of their total assets, the cost of a default is much higher for the province than for Fidelity (the biggest holder of the BP21 bond),” analyst Martín Vauthier said.</p> <p>The payment triggered a recovery in most Argentine bonds’ prices, although the benchmark index for Argentina’s stock market, Merval, did not react as positively.</p> <p>Some believe Kicillof’s move ultimately revealed that Argentina’s hand is a weak one. “The only way to negotiate and be taken seriously is to be willing to default. If you keep paying, no one is going to negotiate a haircut of the magnitude that is needed,” Miguel Boggiano, a pro-market analyst, tweeted out.</p> <h2><strong>Ball in Guzmán’s court</strong></h2> <p>After the entrée of Buenos Aires Province, the main course of the national government debt renegotiation is coming up next.</p> <p>The stakes are much higher: Argentina has more than 40 billion dollars in debt with private holders <a href="">maturing this year</a>. According to a <a href="">schedule</a> published by Economy Minister Martín Guzmán last week, the country will present its restructuring offer on the second week of March, with a deadline to accept it by the end of that month.</p> <p>In addition to that conflict, Guzmán said this week that he wanted to go further. During his visit to Vatican City, the minister called to renegotiate debt not only with private bondholders and the IMF, but also with the <a href="">Paris Club</a>, a group of nations acting as creditors to which Argentina has often appealed to raise money.</p> <p>Paradoxically, it was Kicillof himself who agreed on the terms to settle a defaulted debt with the Paris Club in 2014, when Fernández de Kirchner’s administration was trying to settle all of the country’s remaining debt conflicts (before failing at the last hurdle in the conflict with the so-called “vulture” funds at the courts of New York). Kicillof’s strategy at the time was very similar to what he ended up doing this week in the province, playing hard ball at first but ultimately accepting very favorable terms for the creditors when time was running up.</p> <p>Guzmán said Argentina did not want to pay 9 percent interest rates on its Paris Club debt, arguing that all creditors should have to make a similar effort.</p> <h2><strong>Troubles showing</strong></h2> <p>This week, however, has not been good one for Guzmán. His proposal to restructure Argentina’s AF20 bond, which has a maturity of more than USD 1.5 billion next week, was almost universally rejected by creditors.</p> <p>Guzmán promised to pay all maturities until the restructuring process was completed but, similarly to Kicillof, aimed for a haircut to save some money. Only 10 percent of bondholders accepted Guzmán’s proposal, meaning that Argentina might now need to print more money (or find it elsewhere) to pay the remaining 90 percent of that debt next week, or find an alternative agreement beforehand. (A default, in this case, is not seen as likely.)</p> <p>With small maturities proving so tough to navigate, the full restructuring of Argentina’s foreign bonds next month is certainly looking uphill.</p> <p>

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Ignacio Portes

Ignacio Portes is The Essential's General Editor. Former Economy editor at the Buenos Aires Herald, he has also written for publications such as Naked Capitalism, NSFWCorp and Revista Debate.