Argentina’s new president, Mauricio Macri, has reached a preliminary agreement to end a 15-year legal battle with holdout bondholders that locked the country out of capital markets. Argentina plans to issue $15 billion in bonds to fund the payments to holdout creditors, paving the way for other issuances by Argentine provinces and private companies.
Even before the holdout announcement, Argentina’s local debt capital market showed signs of activity, as several companies, including state oil firm YPF, oil producer Pan American Energy and Telecom Personal, took advantage of market optimism following Macri’s electoral victory in November.
More Argentine companies and entities are expected to test debt markets in the coming months once Argentina completes its plan to issue two or possibly three new sovereign bonds to finance its payment to holdout creditors. The government hopes to return to global credit markets in April, Finance Minister Alfonso Prat-Gay has said.
For many potential Argentine corporate issuers, timing will be key, as they look to navigate volatility in local and international debt markets. Corporate borrowers with maturing short-term debt will weigh whether waiting for a holdout resolution and the subsequent improvement of credit risk will bring better pricing.
Holding off also raises the risk of worsening international conditions as well as higher domestic inflation and a further devaluation of the peso.
Bankers, analysts and asset managers expect strong interest in Argentina’s first sovereign bonds once the holdout agreement, which still requires congressional approval, is completed.
It will be a “turning point” for companies planning to raise funds in the international debt capital markets, says Hernan Slemenson, partner at law firm Marval, O’Farrell & Mairal. “The local bond market is likely to pick up also, but we see international issuance first.”
Provinces and municipalities are expected to be among the first Argentine issuers to tap the markets to raise funds, revamp their debt profiles and extend maturities. The public sector remains underleveraged, with significant needs in infrastructure and a cumulative fiscal deficit that was more than 7% of GDP as of December 2015, according to the finance ministry.
Some issuers have already decided to move. Argentina’s largest province, Buenos Aires, has forged ahead with plans to issue a dollar-denominated for up to $1 billion. And at least one high-profile Argentine company, real estate developer Grupo Irsa, recently announced plans for a cross-border bond offering.
For corporate borrowers, waiting for the holdout issue to be fully resolved and to see how the market reacts to a new sovereign benchmark brings benefits.
“If the sovereign’s credit ratings improve, many Argentine company ratings can be lifted right afterwards,” says Veronica Amendola, vice president at Moody’s for corporate analysis in Argentina.
Argentine companies have pent-up financing needs because of Argentina’s status as a longtime financial pariah. Many companies locked out of the markets have had to finance operations through cash flow and revenues, resulting in constrained growth and large needs for investment in capital expenditure.
Much, though, will depend on the success of the sovereign’s return to international capital markets. “Everything will depend on the pricing, and their ability [the government’s] to show some tangible progress towards solving their [macroeconomic] problems,” says Jonathan Lemco, sovereign strategist at Vanguard.
Argentina will likely have to pay a hefty premium – some say as much as 10% — to compensate investors for taking what Lemco calls a “very big risk.”
“They don’t have an option and should take as much as possible,” says James Craige, head of emerging markets at Stone Harbor Investment Partners.
Assuming Argentina successfully issues new sovereign bonds, companies in the agribusiness and energy sectors are expected to be at the forefront of potential corporate borrowers.
But those companies may face competition in finding enough investor demand in light of the sovereign’s plans to raise $15 billion — the largest bond issue by an emerging market since Mexico raised $16 billion in 1996.
“With $15 billion in supply, I’m not sure how much appetite there will be,” says Craige.
Adds Lemco: “Is there capacity, particularly in the high-yield market, to absorb up to $15 billion in such a short period? The answer is I don’t know.”
That will add pressure on companies deciding whether to wait for the sovereign to tap the market at more favorable rates, or to shoot for a favorable window, says Gabriel Cohen, corporate finance director at Argentine power company Pampa Energía. LF
Additional reporting by Charles Newbery.