Economy

A breakdown of Argentina’s counter-clock debt talks

23rd April 2020

By Ignacio Portes

A breakdown of Argentina’s counter-clock debt talks

Argentina’s default clock is ticking, as the government decided not to pay the USD 503 million in interest for its Global 2021, Global 2026 and Global 2046 bonds yesterday, triggering the start of the 30-day grace period before the breach of the debt prospectus is confirmed.

Simultaneously, the clock of Argentina’s debt renegotiation is ticking as well. Economy Minister Martín Guzmán said May 8 will be the deadline for bondholders to decide on the restructuring proposal presented last week.

As anticipated by The Essential, bondholders this week said they were not content with the offer, calling for an improved bid and a bigger fiscal effort from Argentina’s part.

</p> <p>“Regrettably, despite the efforts of the group and other stakeholders, the proposals contained in the recently published press release are not ones which the group can or will support,” a joint statement from Ashmore, BlackRock, BlueRay, Fidelity and other giant global asset managers who hold around 20 percent of the bonds <a href="https://www.reuters.com/article/us-argentina-debtrenegotiation-creditors/argentina-creditors-refuse-to-tango-on-debt-restructuring-proposal-idUSKBN2221GL">said on Monday</a>.</p> <p>Two separate groups expressed a similar sentiment on the same day. One was the <em><a href="infobae.com/economia/2020/04/20/un-segundo-grupo-de-bonistas-rechazo-la-propuesta-de-deuda-de-guzman/">Grupo de Titulares de Bonos de Canje</a></em>, led by Monarch, who claims to hold 16 percent of bonds and is advised by lawyers who participated in the 2012 seizure of Argentina’s <em>Fragata Libertad</em> navy ship during the conflict with holdout bondholders.</p> <p>The other was the Argentina Creditor Committee (ACC), which includes Greylock Capital and other insurers, asset managers and family offices. The ACC <a href="https://www.batimes.com.ar/news/economy/bondholders-pan-argentina-restructuring-offer-gird-for-battle.phtml">took aim</a> at the lack of a fiscal plan in Guzmán’s presentation, saying that “good faith negotiations depend on the timely exchange of substantiated forward-looking economic and financial information and must be anchored in concrete and feasible economic policies.”</p> <p>So can anything be salvaged in the 30 days ahead, or is the default inevitable?</p> <h2><strong>Different types of holders</strong></h2> <p>According to the research department of Balanz, an influential capital markets operator in Argentina, the country could find it easier to reach a deal with so-called “real money” funds: traditional investment firms such as pension and mutual fund managers.</p> <p>These funds are seen as less speculative and more tightly regulated, which means information about their portfolios is public. According to Balanz’s estimations, around 30 percent of the debt Argentina is looking to restructure is held by these funds.</p> <p>Holding defaulted assets is harder for these funds, which are not specialized in litigation and might not even have the regulatory scope to try creative strategies looking for a better deal, as the 10 percent minority bondholders who did not accept Argentina’s 2005-2010 restructuring did in the previous debt conflict.</p> <p>Those funds are being targeted by the government as the first that could come on board of Argentina’s proposal and begin tipping the scales in their favor, or at least allow the country to avoid a full default. With a somewhat improved offer, Balanz research head Ezequiel Zambaglione <a href="https://www.youtube.com/watch?v=QG2n5rqksT0">argued yesterday</a> in a presentation, a deal with this group could be within reach, although adding that he “would not take for granted.”</p> <h2><strong>Different kinds of bonds</strong></h2> <p>It is also important to understand that Argentina’s international debt restructuring proposal includes different kinds of bonds.</p> <img class="wp-image-9320 aligncenter" src="https://gettheessential.com/wp-content/uploads/2020/04/balanz1.png" alt="Two types of bonds in Argentina's debt restructuring" width="551" height="343" srcset="https://gettheessential.com/wp-content/uploads/2020/04/balanz1.png 1189w, https://gettheessential.com/wp-content/uploads/2020/04/balanz1-300x187.png 300w, https://gettheessential.com/wp-content/uploads/2020/04/balanz1-1024x638.png 1024w, https://gettheessential.com/wp-content/uploads/2020/04/balanz1-768x479.png 768w, https://gettheessential.com/wp-content/uploads/2020/04/balanz1-600x374.png 600w" sizes="(max-width: 551px) 100vw, 551px" /> <p>The key difference is a legal one. The bonds issued after Argentina’s 2005 restructuring process (or its extension in 2010) need the holders of 75 percent of each series of bonds to agree to the restructuring in order to prevent the minority from blocking the deal. The only alternative is getting 85 percent of bondholders of all of the series combined to agree, with a minimum of 66 percent of each series as well.</p> <p>The threshold needed to prevent a minority of discontent bondholders to block a deal is lower in the bonds issued under Mauricio Macri’s presidency, from 2016 onwards. Only 66 percent of the combined bonds issued since that date need to agree to the restructuring to make it happen, as long as at least 50 percent of the holders of each series are on board as well.</p> <p>Reaching a majority with the second group of holders is therefore seen as easier, and raising the offer from 35 cents per dollar to something closer to 45 might get the ball rolling. The good news for the country is that almost 80 percent of Argentina’s debt was issued since 2016, so a deal here would put the Fernández administration in a much stronger position to prevent an international default.</p> <h2>Selective default?</h2> <p>The remaining 20 percent is a much tougher nut to crack. In addition to tougher majority thresholds, the holders of these bonds include many more unknown actors, which could include retail bondholders, hedge funds, distressed asset funds and even some of the so-called “vulture funds” who sue for full payment plus penalties, willing to wait for years and litigate across the globe if needed.</p> <img class="wp-image-9321 aligncenter" src="https://gettheessential.com/wp-content/uploads/2020/04/balanz2.png" alt="Who holds each bond in Argentina's debt offer?" width="602" height="371" srcset="https://gettheessential.com/wp-content/uploads/2020/04/balanz2.png 1193w, https://gettheessential.com/wp-content/uploads/2020/04/balanz2-300x185.png 300w, https://gettheessential.com/wp-content/uploads/2020/04/balanz2-1024x631.png 1024w, https://gettheessential.com/wp-content/uploads/2020/04/balanz2-768x473.png 768w, https://gettheessential.com/wp-content/uploads/2020/04/balanz2-600x370.png 600w" sizes="(max-width: 602px) 100vw, 602px" /> <p>As the chart (courtesy of Balanz) shows, the holders of the 20 percent of bonds issues after the 2005-2010 restructuring are largely obscure, with as little as 3 percent of them known to the public in one of the series. Much larger offers are likely to be needed to get these varied groups of people on board, especially given that the thresholds to an agreement are also higher here.</p> <p>A scenario of this complexity means an intermediate possibility between &#8220;deal&#8221; and &#8220;no deal&#8221; is also possible: a partial deal in which some bonds, held by mostly by certain types of asset managers, are restructured while others aren&#8217;t. In this scenario, Argentina would be under &#8220;selective default&#8221; conditions in the international arena (it is already there with locally issued bonds). With provinces also in the process of presenting their restructuring offers, there&#8217;s several details still in the air before Argentina&#8217;s global debt status is cleared.</p> <p>In addition to Guzmán&#8217;s May 8 deadline and the end of Argentina&#8217;s 30-day grace period in May 22, May 18 could also be a revealing date, as Buenos Aires Province is due a debt payment that day that could anticipate what Argentina will do that same week on the 22.</p> <h2>Deteriorating conditions</h2> <p>Meanwhile, Argentina&#8217;s economy is showing big signs of deterioration locally, a factor which should also play into negotiations.</p> <p>The size of the recession and the amount of unemployed are still hard to estimate, but the government&#8217;s initial expectation of 3 to 4 million people signing up to its <a href="https://gettheessential.com/economy/2020/04/02/argentina-labor-market-unemployment-five-million-coronavirus-lockdown">IFE subsidies</a> for those affected by the lockdown was almost tripled, with more than 10 million registering in the ANSES social security agency website.</p> <p>Fernández is expected to extend the lockdown well into May later this week, as the number of cases is still mostly under control but worries remain in big cities as the winter looms close. Measures to soften or even lift restrictions in less densely populated areas with little to no cases will also likely be announced over the weekend.</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.