Investors closer to debt agreement as deadline nears

21st May 2020

By Ignacio Portes

Investors closer to debt agreement as deadline nears

The sides are getting closer in Argentina’s debt re-negotiations, with creditors and government officials ceding some ground and a deal to restructure payments now looking likely, although important details are still under discussion.

In the last week alone, the biggest bondholders formally lowered their demands to 60 cents last Friday, and are now reportedly willing to go even lower, to 50 to 55 cents per dollar, in order to reach a deal with Argentina.

But the clock is ticking, and the one-month grace period for Argentina’s unpaid bonds expires tomorrow.

So a formal default is also quite likely, although it could come with a tacit agreement from bondholders to continue talks without triggering any legal complaints against Argentina if they believe a deal is only days away from happening.</p> <h2><strong>What changed?</strong></h2> <p>Economy Minister Martín Guzmán’s first offer in April had been <a href="">poorly received</a> by bondholders. Not only did they formally reject the proposal, which <a href="">called for</a> significant cuts in interest but almost no reduction in capital payments: things even got personal and heated, with strong words exchanged in Zoom meetings and pressure to take Guzmán off his role as negotiator.</p> <p>Blackrock, arguably the most powerful fund in the negotiations, went to US Secretary of the Treasury Steve Mnuchin to try to <a href="">get Donald Trump’s help in order to get around Guzmán</a>, who had been designated by President Alberto Fernández as his sole negotiator, and find a different spokesman for Argentina instead. Patience with Guzmán was running low, with Blackrock calling him an “academic” with no real experience in markets as Guzmán insisted he couldn’t move his offer higher given past experiences with countries that made &#8220;unsustainable&#8221; deals only to find themselves in debt trouble again shortly after.</p> <p>But according to some bondholders with close knowledge of the discussions, Guzmán’s role was an intelligent one, playing the bad cop that looked willing to pay nothing in order to force Blackrock and other funds into submitting a lower bid, which they finally did last week.</p> <p>“Blackrock is a huge fund, but they know more about algorithmic trading than about these negotiations. They hired this former Mexican official (Gerardo Rodríguez) for the talks, who got angry with Guzmán, and they didn’t have almost anyone else in terms of advisors. There was no investment bank representing Blackrock, they tried to do it by themselves with no mediators, and eventually they got scared that they would lose more,” the source told <em>The Essential</em>.</p> <h2><strong>Good cop, bad cop</strong></h2> <p>With negotiations progressing, the Argentine government has also changed its tactics somewhat. Reports say it is willing to go above 40 cents per dollar and even close to 50, so the sides could be close to meeting each other.</p> <p>Securing 40 or 50 percent of the original deal would still be a better result for bondholders than what they got from Argentina after the 2001 default. This time around, bondholders are less atomized, with a couple dozen funds controlling most of the bonds, which makes negotiations simpler for Argentina but also makes it easier for funds to operate as a block and set some limits to the country.</p> <p>As well as signaling that there’s room for a more generous offer on their side, Argentina also opened more negotiating channels with bondholders over the last few days. Speaker of the House <a href="">Sergio Massa</a>, who has always been a close contact of foreign investors, was among them, as well as foreign policy advisor <a href="">Gustavo Béliz</a> and some businessmen that hold interests in Argentina and the US.</p> <p>All of them have a better understanding with investors than Guzmán, but the latter could still declare victory if he can show results that reduce Argentina’s future payments by 50 cents per dollar, even though big questions will remain on how to make the resulting debt payments and Argentina’s macro-economy sustainable in the longer run.</p> <h2><strong>Hit and wounded</strong></h2> <p>On average, investors will not lose the capital they originally put in Argentina, only part of the interest payments they expected as a return, as well as the valuable time that their cash spent in the country instead of elsewhere.</p> <p>But pension funds counted on those returns to cover their liabilities, which increase as people progressively retire, so that yield was structurally crucial to keep their books in order. Although Argentina is often a very small share of big pension funds’ portfolios, those responsible for that particular investment likely have their jobs at risk.</p> <p>Other funds also hit perfect storms and could be in trouble as well. An emerging market fund within Ashmore was not only holding a lot of short-term Argentine bonds (which will suffer more than longer term ones, due to Guzmán’s bid to clear the horizon from short-term maturities in order to gain some breathing room before paying), but also invested in Lebanon and Ecuador, who are undergoing similar crises. “These people are trying to minimize losses but will still likely be fired once negotiations finish,” a source said.</p> <p>At this point, a deal is seen as likely to happen eventually, although there is still distance between the sides, so more hiccups before the agreement could also be expected, starting with the fact that Argentina will officially fall into default from tomorrow, even though negotiations will continue after the deadline.</p> <h2><strong>Default, but no acceleration</strong></h2> <p>One measure of whether a country has officially defaulted is whether credit default swaps, a kind of insurance against defaults that trades in secondary markets, are officially triggered. This is likely to happen, but it might not have big practical consequences for Fernández’s administration if a deal is sealed shortly afterwards.</p> <p>“If this constructive dynamic towards a potential agreement is maintained, Argentina’s non-payment before the May 22 deadline will trigger a default, but it will only be symbolic, as creditors are not likely to move forward with the bonds’ acceleration clauses while negotiations are ongoing,” Delphos Investment’s partner Santiago López Alfaro said.</p> <p><a href="">Acceleration clauses</a> are a provision within the bonds&#8217; contract that allow bondholders to demand early repayment of the loans if the original terms are breached. But a certain amount of bondholders need to join forces before that clause is triggered, so it is unlikely that this will happen at this point.</p> <p>The government, meanwhile, will be fighting to meet a different threshold: that of the collective action clauses, or CACs, that <a href="">force minority bondholders</a> to accept the restructuring terms of the majority. Negotiations to reach the CAC threshold in each bond series will be complex and particular, and the government could struggle to meet them in some of them, so there is still a lot of ball to be played before this game is settled.</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.