The Big Idea
Province Buenos Aires | Almost there
Siobhan Morden | July 23, 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.
There has been of an agreement with the largest bondholder and others on revised restructuring terms from the Province of Buenos Aires. It aligns with Amherst Pierpont’s standing long recommendation, our view of declining deal risk and our expected recovery value near 50. Investors should stay overweight after restructuring. The markets should quickly realize the technical benefits of the BUENOS’37A for its higher average 6.2% coupons and the same asymmetric upside optionality as the sovereign.
The revised terms offer a 52.5 weighted recovery value at an 18% discount rate, with the Province conceding to higher coupons, a partial past due interest cash payment through June 30 and stronger indentures. The expiration date was again extended through August 13 with prospects for an imminent closure with bondholders. The latest announcements have allowed for knee-jerk 3-point gains in the latter phase of what has been our core recommendation since March 2021 at price lows of 40. Investors should continue holding long exposure for the high implied 18% exit yields. That translates into high current yield with a more carry than the sovereign and with the same asymmetric positive optionality and benchmark $5.3 billion liquidity of the Buenos’37A. These attractive technical attributes could argue for spread convergence to the sovereign for closer to 16% than 18% exit yields or, alternatively, outperformance after the launch of the Buenos’2037A.
The deal risk is quickly declining on the agreement with the largest bondholder and others on friendlier terms. It is not clear what the remaining stumbling blocks are after the Province of Buenos Aires conceded to higher average coupons and a partial upfront cash PDI payment. The AdHoc committee statement shows some tension on not having engaged in these latest rounds of discussions and, as such, not having endorsed the revised terms. However, the average recovery value of 52.5 from the latest offer compares favorably to the 51.8 of the June AdHoc counteroffer and near complete agreement to their counter-proposed terms. This does not suggest a protracted stalemate but rather an imminent resolution with Minister Lopez announcing majority acceptance rate above the 66% 2015 CAC thresholds, though not quite reaching the higher 2006 CAC thresholds. There are also coercive incentives to motivate participation for risk of forfeiting PDI. Holders who do not validly tender and consent in the invitation will not receive any PDI, and consenting holders of any series for which the requisite majority is obtained to modify 100% of the series will be entitled to receive a pro rata allocation of the PDI corresponding to the eligible bonds held by non-consenting holders.
There were no last-minute surprises or relative value implications with similar higher percentage recovery value across the curve. The press release suggests an upgrade to a stronger indenture perhaps similar to the 2006 versus 2015 bonds to “strengthen the effectiveness of the contractual framework” that adjusts the documentation to creditor proposals. The PDI cash component was slightly higher at 10% versus the June counterproposal of 9.25% and realignment to almost the same creditor proposed cash stream on coupon payments. The break-through was the previous concession for say a 25% haircut on the average 8.2% coupons opposed to the first offer of a 50% haircut. The single series bond 2037A reaffirms a uniform recovery value with PDI the main differentiation across the bonds. The only exception was the 2035 for exchange into the 2037B for lower 41.4 recovery value.
Investors should stay overweight after restructuring. The markets should quickly realize the technical benefits of the BUENOS’37A for its higher average 6.2% coupons and the same asymmetric upside optionality as the sovereign. The implied 18% exit yields may seem reasonable with a 125 bp spread premium to the similar duration ARGENT’38 and a “Kicillof” risk premium to the interpolated Province of Cordoba curve. However, this translates into a low cash price of 46.9 against restructured provincial bonds of 57-77 and much higher current yield of 8.31% for the Buenos’37A with only Jujuy’27 close at 8.06%. The unrestructured City of Buenos Aires and Santa Fe province also offer high current yield at 7.5%-9.3% but with much higher cash prices of 74 to 94. The 8.3% current yield post September step-up for the Buenos’37A would also quickly increase to 11.2% in 2023 as coupons step up to 5.25% in 2023, 6.375% in 2024 and then stabilizing at 6.625% thereafter.
There is also no comparison for liquidity with a high concentration of the defaulted USD bonds into one single series 2037A for a hefty tranche of $5.3 billion. There is nothing that comes close to that benchmark liquidity among the provinces with a tranche that could rival 10-year and 30-year benchmarks in Colombia and Mexico. The Province of Buenos Aires would still be off-index; however, it would no longer be penalized for its illiquidity while also discouraging short-sellers for its higher relative coupons to the sovereign. The bottom line is that the large size would attract relative valuation comparisons to the sovereign whereby the Province of Buenos Aires provides higher coupons and similar upside optionality on the high correlation to the sovereign. The substitution out of the sovereign and into corporates or provinces has been a successful investment strategy with dominant outperformance of the off-index bonds and the difference between YTD profits versus YTD losses. The performing status of the Buenos’37A could also attract more conservative investors after having cured the default post-restructuring. These attractive technical attributes could argue for spread convergence to the sovereign for closer to 16% than 18% exit yields or alternatively outperformance post launch of the Buenos’2037A.