The Big Idea
Argentina | Lowering solvency risk
This material is a Marketing Communication and does not constitute Independent Investment Research.
Argentina’s financing program through 2027 avoids Eurobond markets and puts a high priority on a lower cost of funding, reduced solvency ratios and rating upgrades. The strategy is similar to other credits like Panama seeking to lower overall costs of funds. This may allow for better technical dynamics in the short term but still implies high sensitivity to market conditions with reliance on US dollar purchases and large gross financing needs.
Argentina’s recent Eurobond payments offered some clarity on the country’s approach. The presentation and Q&A discussed the financing strategy through 2028. This suggests a longer planning horizon than earlier short-term crisis liquidity management. The overall funding strategy also clearly puts a high priority on lower funding costs and improving solvency ratios with an eye toward an investment grade rating in 2031. There was also clear aspiration for financing terms on the country’s partial multilateral guarantees with total funding costs of 6.30% to 7.75% on 10-year tenors. This would represent significant savings at 100 bp to 125 bp inside the current Eurobond curve. This should also logically represent a threshold for ‘optional’ Eurobond issuance. The economic team didn’t address the prospects for a pure Eurobond liability transaction; however, there is a clear sensitivity to the cost of financing at current levels.
Alternative financing sources should allow for more favorable near-term supply-and-demand technicals. Argentina has seen high reinvestment inflows based on demand for high-yielding credits. This may allow for further gains against other ‘B’ credits, especially if the credit ratings headlines for Argentina remain supportive, such as Moody’s potential upgrade to ‘B3’ still pending this month. This may continue to trim the liquidity penalty relative to other ‘B’ emerging markets sovereign credits with prospects for still consistent relative near-term outperformance.
There are pros and cons of Argentina’s financing diversification strategy. One near-term benefit would be a lower overall cost of funding. However, some investors seeking higher current yield from higher coupon bonds may be disappointed. The prospects of new Eurobond issuance could incrementally increase investor demand if it offers the opportunity to add higher coupon bonds into structurally overweight positions. The demonstrated market re-entry could also reduce liquidity risks, especially if not only rolling over payments but also lengthening the debt maturity profile by buying back shorter tenors.
This medium-term strategy reflects the confidence to manage near-term rollover risks with the development and commitment from the local markets, the consistent multilateral (or maybe bilateral) financial support, and most importantly, the anchor of the nominal fiscal balance (primary surplus). This may also reflect the recent improvement on rebuilding the stock of external assets and the expectations of lower sensitivity to event risks (plus potential carryover funds into 2027.
Argentina’s consistent accumulation of foreign exchange reserves is necessary to lower the dependence on external capital markets while also stabilizing local sentiment (necessary for domestic debt rollover). This would offer a critical buffer into the election cycle next year. The lower market beta would then become an inverse correlation to higher external assets. The structural improvement of the external surplus would offer an alternative to more activist debt liability management. This strikes a clear contrast to other countries in the region with both Ecuador and Panama actively rolling over Eurobond payments and similarly rated ‘B’ credit Ecuador actively reducing its rollover risks after the 2030 buybacks. The bottom-line implications are for still tactical outperformance and high market beta under supportive external risk with intra-curve preference now shifting to the longer tenors.
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