Uncategorized
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. This material does not constitute research.
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.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
