With its 730 pages of documentation, the debt restructuring of Banco de Galicia y Buenos Aires, Argentina’s largest private sector bank, stands as one of the most complex Latin American debt workouts ever. More than 240 banks and other creditors, including the US government and the Central Bank of Argentina, agreed to participate in the $1.37 billion transaction. This deal simultaneously restructured the bank’s debts and helped rebuild its balance sheet, devastated by the Argentine financial crisis.

The deal, which closed on May 18, comprised an initial exchange of existing instruments for a new longer-term facility with reduced interest rates, followed by subsequent exchanges in which creditors could choose from a menu of options that included combinations of debt and equity instruments, as well as cash. The renegotiations involved lenders, who held $1.036 billion of debt plus accrued interest of debt, and bondholders, who held $453 million plus accrued interest.

Nearly 99% of creditors agreed to participate in the exchange, an indication that the market considered its terms more than reasonable, says Douglas Doetsch, partner at Mayer, Brown, Rowe and Maw, the law firm that represented the creditors’ steering committee. Getting there was not easy. “This was an extraordinarily complex restructuring because of its size and because of the number of existing instruments and different types of creditors,” says Doetsch. “You really had a four-dimensional Rubik cube of a restructuring.”

The composition of creditors, which included US and European banks, the US government’s Commodity Credit Corporation, the Argentine Central Bank, multilateral lenders and bondholders, changed over time as various creditors sold out of the credit throughout the renegotiation process. “Having a relatively large menu of options will tend to make sure that every creditor will find something that is attractive to them,” says Doetsch.

Creditors had to agree first to a par-for-par exchange of their existing notes for longer-term bonds. They also had to agree to swap their existing notes for “units,” consisting of 10-year notes that represented 75% of the units, and subordinated 15-year notes that represented 25%. James Scriven, principal investment officer in the International Finance Corporation’s global financial markets, who chaired the creditor steering committee, says that the goal of the initial stage of the exchange was to recapitalize the bank with sufficient Tier 2 regulatory capital. He says the options available to creditors in the second part of the exchange gave them the incentive to participate in the initial exchange. “The least attractive option for creditors was the first one,” says Scriven. “What made it attractive, was trying to get to the second option.”

One of those options was a debt-and-equity combination. Creditors could elect to exchange their units in the second-stage offer for new six-year notes representing 75% of their units and preferred shares of the bank’s holding company, Grupo Financiero Galicia, representing 25% of their units. Creditors electing this option received 1,000 preferred shares for each $671.14 principal amount of the subordinated notes from the initial exchange. They had the right to receive 12% of Grupo Financiero Galicia’s equity or, since Argentine law requires existing shareholders to get a preemptive right to new shares, creditors could get a combination of shares and cash paid by shareholders who subscribed to the  rights offering. Distributing a portion of Galicia’s equity to creditors was seen as a way to share the burden of the restructuring more fairly, says Scriven. “The creditors recapitalized the bank and got compensated by equity at its market price.”

Creditors who did not want equity could opt for new dollar-denominated 10-year notes at par, take some cash, or accept the government’s (performing) eight-year Boden peso bonds at a discount. Creditors could also pick a new money option in which they received allocations of medium-term bonds but had to agree to make fresh credit lines available to the bank for trade finance to offset the relative value of the six-year bonds.

Banco Galicia’s recovery was never assured following its collapse in 2002. The bank was particularly vulnerable to the fallout from the Argentine financial crisis because of its status as the country’s largest locally owned bank size and because Galicia had no foreign backer to step in and save it with a capital injection. Depositors had begun withdrawing money in December 2001, as the government’s debt default loomed. “For our size as a private Argentine bank, the systemic run had a far greater impact on us than everyone else,” says Sergio Grinenco, Banco Galicia’s chief financial officer. Depositors moved money from local banks, perceived to be riskier, to foreign banks that appeared more solid. “There was a run, within a run, within a run,” he says. “It was a liquidity crisis that no system on earth could survive – no system on earth can return 60%-80% of deposits at a moment’s notice.” 

A Long Struggle
By February 2002 Galicia was technically bankrupt following the government’s default, the devaluation and a subsequent asymmetric pesification that repriced bank’s balance sheets at different rates. Judges later ordered banks to repay some depositors at the predevaluation exchange rate, exacerbating the liquidity drain. Galicia’s executives called several of its major creditors, including the IFC, to see if they would be willing to capitalize a portion of their debt. Scriven says the commitment from the creditor group, which represented about $300 million in loans to Galicia, gave the Central Bank the reassurance it needed that Galicia had the necessary support to pursue a reorganization of its debts.

By July 2002, Banco Galicia had scraped together 700 million pesos from a deposit insurance fund, through the sale of assets and by putting its best-performing financial assets into a trust. By August, deposits had stopped declining and the government gave depositors the option of exchanging their deposits into government bonds or restructuring them over time into certificates of deposits, which greatly improved the bank’s cash position. Says Grinenco, “We were able to rebuild assets and liabilities bit by bit.”

Negotiations between Banco Galicia and its creditors began in July 2002. A steering committee was established and each of the parties hired financial and legal advisors. Talks between the parties were complicated by Argentina’s economic instability. Another factor was the sale of Galicia debt on the secondary market. Many US bank creditors had to provision their exposure to Galicia at 100% and decided to unload the debt. 

Conversations between Galicia and its creditors continued well into 2003. “It took a long time before the financial outlook for Galicia could be accurately determined,” says Sam Coleman, managing director and head of Latin American financial institutions at Citgroup, which advised Galicia in the restructuring. “Galicia was affected by all the uncertainties that impacted Argentina’s banks during the past two years.” By November 2003, members of the steering committee signed a letter of support for the basic structure of a two-step deal proposed by Galicia, which was followed by the launch of the public bond offer on December 23.

‘Correct  Terms’
Julian Jacobson, a director at Fabien Pictet, a London-based emerging market investment manager, says creditors realized the bank’s offer was reasonable. He bought Banco Galicia bonds in the secondary market both before and after the terms of the restructuring were announced. Jacobson says that in contrast to the government’s debt negotiations, Banco Galicia offered the “correct” terms. “The reason why the Argentine government is taking so long is that everyone thinks that it can offer more,” he says. “Galicia offered what was reasonable. They acted in good faith and they offered a decent deal.”

Grinenco says the bank wants to strengthen its retail operations, where it has increased market share to 12%. “We are catching up and growing each month and getting very good results,” he says. “We have achieved this by focusing on small companies and retail credit cards.” Still, most of the bank’s assets consists of non-performing government debt accounted for at face value on the books. “We are building a new bank,” he says. “The new bank is growing with assets from the private sector. We want to go back to being a real bank.” LF