Seven key points in Argentina’s latest debt proposal
Argentina is re-negotiating an estimated USD 66 billion in dollar-denominated debt under foreign jurisdiction. Alberto Fernández’s government has argued it can’t pay these sums under its original conditions, and is looking to issue 5 new bonds maturing between 2030 and 2047 in exchange for the current bonds, issued during the Kirchner and Macri eras.
The country has already made four exchange offers to its creditors, and sent this last one to the US’ Securities and Exchange Commission (SEC), with August 4 as the deadline to accept it, plus a potential extension of the deadline until the end of the month.
To understand what Argentina has been conceding to try to bring negotiations to a close, this seven point summary will serve as a summary of the current status of the offer.
The first key point is that Argentina is currently offering a net present value (NPV) of 53 to 54 cents on the dollar for the bonds issued during Macri’s presidency, rising to 57 cents on the dollar for the bonds issued during the Kirchnerite era.
This is a significant improvement compared to Economy Minister Martín Guzmán’s initial offer, which stood between 37 and 39 cents on the dollar.
No capital write-offs
How is this improved offer, looking to bring the sides closer, achieved? First of all, Argentina is asking for smaller reductions in capital than it originally did.
On average, it is asking for a 1.9 percent reduction on its principal, reaching 0 percent in the case of the “Par” and “Discount” bonds issued during the Kirchnerite years. In its original proposal, Argentina had offered a 5.4 percent cut on capital.
Basically, Argentina is accepting that it will have almost no capital write-offs. Argentina will continue to owe the same USD 66 billion than before the debt restructuring proposal, and any significant savings will not come from this area.
A smaller cut in rates
There is a significant difference, however, in the interest rate that the government is offering.
Here, Argentina has reduced its demands from a 2.3 yearly interest rate in its original offer to a 3.07 percent average rate in the latest proposal.
This new 3 percent interest rate on offer would still translate into important savings for the government, because the original bonds it is trying to exchange had average rates above 7 percent per year. Here is where Argentina would make the most significant gains.
The fourth item to consider is the moment in which interest payments start in this new proposal. Argentina’s presentation before the SEC includes interest payments from August 2021, compared to late 2023 in the original offer.
Basically, Argentina moved from doing almost no interest payments during the Fernández presidency to begin paying a year from now, midway through his term. These payments will start at a very low rate of 1 percent and increase progressively with time.
Extra interests on defaulted bonds
A fifth issue is that the government will pay the interests accrued by the bonds whose payments Argentina did not meet during the negotiations.
This means that the bondholders who accept a deal before the latest deadline of August 4 will be paid an extra sum for the USD 500 million in defaulted bonds that matured on April 22, plus another round of USD 500 million that matured in June.
The holders of those bonds will be compensated with additional interest payments up to August 31 if they accept Argentina’s current offer.
With regards to contract clauses, the latest offer says that bondholders of the 2005 and 2010 series, whose default clauses are more favorable for debt holders, will retain those rights, which are more restricted in the bonds issued during the Macri era.
The bonds issued during the Kirchnerite era needed a higher amount of bondholders agreeing to a debt restructuring in order to force the minority to accept its conditions. A majority of 75 percent of bonds was needed in each series of the Kirchnerite-era bonds to force a new restructuring, compared to 66 percent in the 2016 indentures.
The last key point of Argentina’s debt restructuring offer is the acceptance threshold that will be required for it to go ahead.
If 60 percent of the bonds’ collective action clauses aren’t triggered, then the restructuring will not be signed and a new agreement will need to be discussed. This was demanded by some creditors before accepting the country’s conditions, as they feared entering into an exchange proposal only to find out later that many others didn’t and opted for litigation instead.
This way, creditors who accept early know they won’t lose end up comparatively losing out if most others go for a better payout by battling Argentina in a New York tribunal, as the 2005 holdouts did in the past.
All in all, Argentina’s original offer looked to save USD 44.8 billion dollars, and that sum has shrunk to USD 31.5 billion today. So Guzmán would still be saving the country a significant sum, but an additional USD 13.3 billion is now being recognized for the bondholders.
The government still has a lot of work to do to secure majorities in each of the bond series in order to prevent new rounds of holdout conflicts, but if a deal is reached this would clear Alberto Fernández’s financial path very significantly during his presidential term. Originally, the government had to deal with USD 25 billion in maturities during its 4-year term, but that figure would plunge to around USD 2.5 billion if the deal is signed: 90 percent of those short-term financial obligations would be out of the way.