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Argentina | Final offer?

| June 19, 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.

Argentina has presented what looks like a final offer. And although terms improved to a recovery value of around 50, including a maximum of 3.8 points of export-linked warrants, the country has not reached consensus with bondholders. This has deflated hopes for compromise and increased the risks of legal backlash as bondholders “consider all available rights.”  Either stress looks likely to ultimately force a compromise or Argentina instead will push forward with minority participation and a slower resolution of the debt crisis.

These high stakes negotiation tactics seem so unnecessary for a country that could just smooth out some residually higher coupons over a longer repayment schedule.  Economy Minister Martin Guzman is next week on the schedule for several highly visible panels suggesting that he’s focusing more on a campaign to seek public validation and coerce bondholders to accept the final terms. The markets should continue to disappoint near-term until there is goodwill to reconcile for a compromise solution with June 30 still the next informal deadline.  Argentina still stands to lose more with a protracted default and a final offer with only minimal participation and coercive legal tactics to aggregate the CAC thresholds through re-designation strategy. The deal risk is still stubborn with current prices at 38 to 42 against the potential upside of latest offer of 46 plus maybe 2 to 3 points for export-linked warrants at an 11% discount rate.

Exhibit 1: Argentina’s proposal for bondholders

Source: Argentina, Amherst Pierpont Securities

The official statements from Argentina suggest that talks are now broken. Argentina recently released an updated draft offer under the caveat that “investor demands frequently diverge, and cannot be readily reconciled.” The offer did improve from the previous revisions with average recovery value improving from 46.7 to 50.6 including the accrued bond and a maximum valuation of 54.6 including the potential export linked warrant payments (10% discount rate). The fixed payments were improved either by shortening the maturities and the grace period, increasing slightly higher the coupons and offering slightly less capital haircut at only 3% across the Macri bonds. It’s also now a more straightforward menu of bonds and allocation process with substantial improvement to the intermediate and longer maturity bonds versus the second offer.

There were some initial details of the “recovery value instrument” including the criteria for an export-linked warrant.  The maximum potential valuation at a 10% discount rate is only 3.8 points for the maximum coupon of 0.75% between the years of 2026 to 2046. The strike criteria seem reasonable to achieve this coupon on referencing the 7% average annual export growth (1911-2019) against the “backstop floor” of minimal 3% annual export growth.  However, there is high volatility on the boom/bust cycles that suggest a few years of non-payment and a downward bias to the maximum 3.8 points valuation. For example, from 2012 to 2019 export growth has only exceeded 3% annual growth in 2018 and 2019. This “recovery value instrument” does offer a sweetener to the fixed payment terms.  However, it doesn’t exactly allow investors to share in the upside of potential payment capacity with maybe easy strike criteria but a rigid payment cap that restricts investors from benefiting from higher repayment capacity.

The joint counteroffer from the Ad Hoc/Exchange Bondholder group continue to request a portion of upfront cash payment, no haircut on principal, a GDP-linked warrant and other legal terms while the Bondholder Group requests terms on NPV of 50-54 and other legal considerations.  The Ad Hoc/Exchange Bondholder group reduced their average coupons and eliminated the PIK feature with lower NPV of 47-58 from their previous average 60 NPV proposal. These aggregate recovery value estimates from bondholders do not seem so far from the latest Argentine official offer but still require goodwill against what appear as tense relations and still unresolved specific legal/payment considerations.  The bondholders are sensitive to mark to market on the final terms while Argentina should be less sensitive on medium term repayment scenarios; however face clear ideological and political constraints.  President Fernandez makes the final decision and clearly wants to resolve the debt crisis with the markets awaiting forward guidance on whether the negotiation tactics are coercive or friendly.

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john.killian@santander.us 1 (646) 776-7714

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