The Big Idea
Argentina | Instrument selection
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Argentina’s latest bond buyback and its approaching election cycle merit a reassessment of relative value across available debt. Investors should maximize near-term carry while minimizing the risk of a difficult economic adjustment, scarce funding, low foreign exchange reserves and subsequent high default risk. Although the deluge of sovereign bonds issued under Argentina’s Macri administration from 2015 through 2019 and restructured under the current Fernandez administration still represent core holdings among many emerging markets investors, Province of Buenos Aires (BUENOS’37A) remains my top pick because of higher carry and stronger fundamentals than the sovereign.
The bond buyback operation has muddled the relative value dynamics across the sovereign curve. A strategy of preferring higher coupon bonds has backfired as the buybacks targeted the lowest coupons. It’s not clear what the objective was in buying back the 2029s and 2030s. The low coupons save less cash and have less impact on medium-term payments and debt sustainability. The buybacks leaves default risk high after the political transition.
The broader strategy probably aims to reduce financial market stress and contagion to the economy through the election cycle. The buybacks did logically push up bond prices and secondary flows, with informal estimates of cumulative buybacks ranging from $300 million to $450 million.
There is now a clear price disparity between the low coupon bonds with the 2029s and 2030s trading with a 3.5- to 5-point price differential to the similar low coupon 2035s through 2046s. Will this price disparity continue?
There have been headlines about another $2 billion in funds to continue the buyback operations, beyond the $550 million to -$700 million remaining of the initial $1 billion. These buybacks could become increasingly expensive with a squeeze towards higher bond prices between lower secondary supply of bonds and consistent official demand. The higher price premium of these bonds may actually encourage the treasury to just quietly suspend the buyback operations, especially if scarce dollars do not strengthen the Blue Chip foreign exchange rate.
These recent price gains on the 2029s and 2030s are increasingly vulnerable to retracement. The high relative price premium contrasts with their low carry and continuing high default risk. The 2030s offer some upside from the 4-point sinking fund payment in July 2024, if the debt restructuring postpones well into 2024. However, the overall debt payment become increasingly onerous into 2025 on the large sinking fund payments. The shortest maturity bonds actually remain the most vulnerable to restructuring for their accelerated sinking fund schedule. The 2030s represent near half of total Eurobond amortization payments at $2.78 billion a year beginning in 2025 through 2030 and a third of total Eurobond debt service.
The pecking order on instrument selection should still favor the higher coupon Kirchner bonds – 2038s, 2041s and then the Macri bonds – 2035s, 2041s if Argentina remains current on payments into January 2024. This relative value analysis of clipping the last coupon payments before default is quite dismal. My preference is to not only prioritize high coupon bonds but also minimize default risk. This is where the Province of Buenos Aires offers considerable upside relative to the sovereign. The BUENOS’37A is trading at the highest spread premium to the ARGENT’41 for its off-benchmark status but without any recognition of its superior cash flow and debt leverage fundamentals. The 2023 budget shows low debt service with considerable cashflow relief post 2021 restructuring and, similar to other quasi sovereigns, low leverage on their inability to deficit finance.
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