(Updates bond prices and adds stock prices to reflect rally in domestic and foreign markets)
Argentina improved its offer to restructure $66 billion in foreign-law bonds to trim the losses for creditors on Sunday night, the latest effort to rally enough support for a deal to avoid potentially lengthy lawsuits and the prospect of being locked out of international financial markets just when the economy faces perhaps its worst recession in history.
An updated proposal by Buenos Aires, which gained a receptive ear from some investors, also helped send Argentine assets sharply higher in both domestic and foreign markets.
The Economy Ministry said it reduced the principal haircut on the eligible bonds, increased the coupons and shortened the maturities on the new bonds it is offering in exchange. Argentina made its initial offer on April 21.
As well, it introduced accrued bonds as sweeteners: a dollar-denominated one paying 1% interest and euro-denominated note paying 0.5% interest, and both maturing in 2030. The accrued bonds will be “delivered as consideration for any accrued and unpaid interest from and including the last date on which interest was paid under the eligible bonds up to but excluding April 22, 2020,” it said.
In another change, the ministry said it will allow holders of eligible bonds in euros and Swiss francs to swap them for new bonds denominated in dollars, including the accrued bonds.
The ministry also shaved the grace period on payments to one year from an original three years, saying that interest payments will start September 4, 2021, but only for those that accept the restructuring offer.
The changes come after months of talks with creditors, including some of the world’s largest investment funds like BlackRock and Ashmore, failed to rally enough support — generally 75% — to activate the collective action clauses in the bonds to require all investors to accept the terms.
Based on the feedback from bondholders, the ministry said it made the changes to encourage their participation with the goal of putting the economy back on track for growth.
“The new debt profile that emerges after the restructuring must be consistent with the economic recovery and the strengthening of a growth path that will enable it to meet the current challenges imposed by the COVID-19 pandemic, the attention of which cannot be postponed while remaining sustainable in the medium and long term,” Economy Minister Martín Guzmán said.
The economy has been on lockdown since March 20 because of the spread of the deadly coronavirus. The lockdown, which is due to end July 17, is expected to result in the economy shrinking by up to 12.9% this year, according to a survey of economists by the central bank published on Friday. That would be worse than a 10.9% contraction in 2002, then considered the sharpest one-year drop in the country’s history.
“We have done our part on the basis of full commitment to the principle of ending the debt crisis in a sustainable way,” Guzmán said. “We hope that our creditors understand the restrictions we have and appreciate our willingness to reach an agreement that works for all parties.”
Argentina’s president, Alberto Fernández, hinted that this was the final offer.
“It is the maximum effort that we can make,” he said in a statement.
It has yet to be seen if creditors will accept the offer, but it has gained some praise, including from a leading member of the economy team of the opposition political coalition that ruled from 2015 to 2019. Luis Caputo, economy minister from 2017 to 2018, said the incentives should discourage creditors from holding out.
It is “a fair proposal that should have a high participation,” he said on Twitter.
Gramercy Funds Management and Fintech Advisory Inc., two of the creditor groups that have been closest to reaching an agreement with the government since the offer was first announced, said hours after the new offer that they were in favor.
“We look forward to supporting Argentina’s offer,” Gramercy said in a joint statement. “It provides for the debt sustainability that is crucial for durable, high and inclusive economic growth.”
ASSET RALLY
In the wake of the new offer and the receptive stance of some of the creditors, Argentine assets gained ground on Monday, from the sovereign bonds to the stock markets, both foreign and domestic.
Sovereign bond prices popped higher. The 4.625% 2023 issue surged 2.25 points in price to bid 43.75 while the 5.875% 2028 issue climbed 1.20 points in price to bid 39.96. The 2038 Par bonds rose 2.375 points in price to bid 41.125 points and the ultra long 2117 issue rose 1.25 points to a bid price of 40. All prices according to data provider Refinitiv.
In Argentina the benchmark MerVal stock index, climbed more than 9 percent. Shares of Argentine companies that trade on the US markets also gained ground. Among those, State-run energy company YPF surged 7.58% to $6.24 a share while agriculture commodity company Cresud rose nearly 40% to $4.18 a share. Banks such as Grupo Supervielle climbed 22.7% to $2.70 a share and Group Financiero Galicia gained 22.77% to $11.32 a share.
Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, said in a note to clients on Monday that the offer “looks reasonable,” estimating the recovery value at 53. However, she warned that the deal can still be blocked by two creditor groups who have joined forces — Ad Hoc and Exchange Bondholder — because they have a 35% share of the existing bonds, exposing the country to legal risks. It took Argentina more than a decade to deal with the holdouts from its 2002 default on $100 billion after the offer was first made in 2005.
“The average recovery value is much higher than the initial 40 offer with more flexibility and concessions after weeks of negotiations and an agreement in principle with some bondholders,” she said. “The risk of holdouts would imply legal risks and a higher exit yield that lowers the recovery value of the transaction.”