Argentina | Unilateral and coercive offer
admin | April 17, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
As the market continues to wait for a restructuring proposal from Argentina, a likely offer with low recovery value faces high risk of rejection, raising the risk of hard default next month. There is no rush to accept the first offer when Minister Guzman announced no plans for any payments within the next three years. Still, Argentina’s bond prices seem resilient relative to Ecuador, curious given the risk of hard default and the lack of a clear framework for a successful restructuring.
As Argentina has steadily delayed outlining a detailed proposal, Minister Guzman continues to reaffirm an aggressive restructuring offer. The opening remarks set the stage. Minister Guzman himself says that he has not reached an agreement with bondholders and yet imposes an aggressive 20-day deadline. It’s hard to understand why Minister Guzman would present a deal that he admits will fail. The presentation and rhetoric seem to be focused on a domestic political agenda with no apparent goodwill to broker a compromise with bondholders. The initial payment terms mostly align what has been circulating in the local press. They include a 62% cut on coupons and a 5.4% cut on capital, a 3-year grace period on all payments, a step-up coupon of 0.5% and average coupon of 2.33%. There may not be much of a haircut on capital; however an average interest rate of 2.33% is aggressive compared to the current average coupon of 6.6% with subsequent significant loss in coupon payments.
Cash flow analysis still suggests low historic recovery value near 30 based on a 62% haircut on coupons and no payments for the next three years. It’ll depend on whether the specific details can tweak that level slightly higher. It could be possible to reach slightly higher recovery value on a benchmark bond alternative menu and, say, 2025, 2035 and 2045 bonds that minimizes the losses for the longer tenors and allows for more gains on the shorter tenors. The local press suggests that the menu of bonds could include a new par bond and discount bond. The previous assumption was that the individual bond payment terms would be altered through collective action causes; however they could offer instead an exchange into new benchmark bonds. There are many potential combinations with hopefully the final details released April 17.
The recovery value also remains a function of the exit yields. This is controversial and critical to the success or failure of the transaction. Although significant debt relief should improve future repayment capacity, repayment capacity also depends upon effective policy management and favorable external factors. The acute economic crisis, continuing low commodity prices and ideological constraints do not provide much confidence about future debt repayment capacity. The official reference to a normalized yield, say 8% to 9%, just isn’t realistic for a country that has minimal policy flexibility to manage the external shocks while ‘B’ peers trade at yields of 10% to 11%. The 12% exit yield still skews the recovery value towards low levels, especially for the longer tenors with much lower survival probability of the notional amount. This may explain the difference between local headlines of $45 to $55 recovery compared to other estimates closer to $30.
There is no urgency to accept the first offer when there are no prospects for any payments anytime soon. This perversely encourages holdouts, especially for the 2021, 2026 and 2046 coupon payments on April 22. Expectations remain low without goodwill for a negotiated compromise. The next phase will focus on the aftermath post default including new potential lows for bond prices, possibly near $20, the potential shock to the real economy and an eventual resolution only after global conditions improve and the economic team revises the offer.
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