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Buenos Aires| Debt restructuring

| March 26, 2021

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.

Investor patience is wearing thin on restructuring $7 billion in Buenos Aires Eurobond debt. The bounce on BUENOS bond prices in recent sessions reflects improved terms from the province administration after a year of nonpayment and steady repetition of a lowball offer. Despite recent flexibility, the negotiations still look difficult. Investors hesitate to forfeit high coupons and instead are filing lawsuits in New York this week. It is hard to believe that Argentina wrapped up its debt restructuring last September while the impasse continues in the Province of Buenos Aires. Still, there is upside.

The main point of contention focuses on whether the Province of Buenos Aires requires solvency relief with large haircuts on coupons. The current low bond prices of 40 reflect a floor on the latest offer and historic recovery value. There is asymmetry to the upside if the final terms translate into higher relative current yield compared to Argentina’s sovereign debt and recognize high past due interest that accumulates through a final debt restructuring.

The latest official statements confirm revised guidance including no haircut on capital (prior 10% haircut), a higher average coupon of 4% and slightly shorter maturity extension of 11 years instead of 13 years.  There was also a shift towards intra-curve equity with no differentiation between the 2006 and 2015 indentures while also payment-in-kind for past due interest on a more simplified 50%-50% allocation of the new BUENOS’31 and BUENOS’39 bonds. The NPV at 11% discount rate translates into average recovery value of 60.1 and a substantial improvement against the initial offer of 45.5.  This is not too far from the earlier expectations that the province, similar to the sovereign, would provide a 37.5% improvement from initial to final offer.

But now it gets more complicated.  The Province of Buenos Aires now faces a more rigid stance from bondholders. The counter-response from the bondholders (GTAM proposal) was for much higher 6% average coupons for average NPV of 76 (11% discount rate).   The debate is whether the province requires solvency relief and a large haircut on coupons.

The lessons learned from Argentina may now contaminate the Buenos bondholder discussions.  The critical flaw of the sovereign debt restructuring was for bondholders to accept the large 60% haircut on coupon payments. The previous exit yields of 11% on the ARGENT’35 last September have since reached highs of 17% due to a weak economic policy framework that undermines future debt repayment capacity.  The weak economic framework and balance-of-payments stress affects all Argentina corporates and quasi-sovereigns with higher convertibility risk. The recent foreign exchange restrictions represent a new worse chapter for Argentina default on forced default for corporates and quasi-sovereigns.

So, bottom line is that bondholders are paid almost nothing over the next few years for the sovereign and may face another debt restructuring once coupons step up and amortizations start to sink. The convertibility risk would also contaminate future payment capacity for the quasi-sovereigns.  For serial defaulters, the coupon payments are maybe the most important payment stream.  This realization may harden bondholder negotiations with the Province of Buenos Aires.  The latest proposal and counterproposal is the difference between average coupons of 4% and 6%, still a significant discount from the high average 8.2% coupons of the defaulted USD bonds. The Province of Buenos Aires, with its low leverage ratios, has not yet shown any debt sustainability analysis that merits a substantial discount on coupon payments.

The legal pressures may encourage political intervention from a sovereign that is already struggling from worse policy credibility.  There is a clear contrast on economic agendas with Argentina Finance Minister Guzman seeking to normalize creditor relations on recent IMF meetings while creditor relations deteriorate in the largest province of Buenos Aires. There have been few if any provinces that have been reluctant to engage bondholders. Most provinces have already completed their restructuring under mostly bond-friendly terms with the Province of Buenos Aires a clear outlier, especially compared to the highest rated and performing credits of City of Buenos Aires and Santa Fe.

The revised terms suggest less relative value opportunities (higher coupon bonds have slight advantage like the 9.95% 2021s, 2028s and 2024s) and more a directional trade based on deal risk, final terms and discount rate. The average bond prices bounced 2 point to 3 points on the upward revised guidance.  However, the two sides are still far apart between latest official guidance of 40.7 and 54.9 counteroffer at 16.5% exit yields.  The current BUENOS prices at 40 reflects the discount rate similar to the sovereign at 16.5% (similar duration ARGENT’38 and ARGENT’46) and have adjusted to the upwardly revised terms. Deal risk is still high based on the intransigent posture from both sides.  However, the current low debt prices of 40 reflect a floor for quasi-sovereign recovery value while high coupons continue to accumulate. The implied exit yields given the deal risk is also quite high at 16.5% for a credit with low leverage and potentially still high current yield, especially if coupons are negotiated higher.  If sovereign yields decline in late 2021 on a negotiated IMF program, then this would also represent leveraged higher returns for the Province of Buenos Aires. There has been often reference of the asymmetrical risk as the primary rational for long positions in the sovereign; however, the Province of Buenos Aires offers stronger arguments on better solvency ratios, higher PDI accumulation and potentially higher coupons on restructured bonds.

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