Argentina said it will seek to restructure $83 billion in foreign currency debt with an offer to bondholders that will seek a grace period, an extension in maturities, a reduction in coupons and a potential haircut.
The Economy Ministry laid out its latest guidelines for the debt restructure in a nine-page document posted on its website late Tuesday. While some of the contents had been announced before by Economy Minister Martín Guzmán, including in a March 20 webcast with bondholders, the document puts the amount in the restructure up from a previously proposed $68.8 billion.
The proposal now includes all foreign currency debt, whether it is local or international law, but it has the same goal of pulling the country out of a debt crisis, according to the guidelines.
DEFAULT RISK
The risk of default began to increase last August after a sharp depreciation of the peso led the then-government of President Mauricio Macri to extend the maturities on local-law bonds. His successor, Alberto Fernández, has said he wants to restructure the foreign currency debt to give the economy time to recover from a recession, currently in its third year. Gaining time would also allow tax revenue and dollar inflows from exports and foreign investment to increase so that debt payments can be made on time without the overhanging worry of a default.
While Fernández had wanted to do a fast and friendly restructuring, the proposal to wrap up a deal by March 31 was stalled by the spread of the deadly novel coronavirus, COVID-19, which has surged in Argentina from one confirmed case at the start of March to more than 1,000 cases and 28 deaths on April 1, according to according to the Johns Hopkins University’s Coronavirus Resource Center.
“The priority in Argentina at the moment is the health and life of the Argentines,” Fernández said on Monday. “I trust that they [the creditors] will understand this.”
His administration has shutdown most of the economy with a stay-at-home order for the 45 million population from March 20 to April 13, leading economists to forecast a worse recession than previously expected. Goldman Sachs has cut its estimate from a 1% contraction to a whopping 5.4% contraction, the worst of the countries it covers in Latin America after Ecuador.
To return to sustainable debt levels, the government will ask bondholders for “a substantial grace period … to open the necessary space to allow for Argentina’s real activity to recover after the series of shocks the economy has been going through,” according to the guidelines.
This will gain it time to rebuild the central bank’s reserves, which have plunged 43% from $77.5 billion in April 2019 to less than $44 billion at the end of March. The target is to reach $65 billion by 2024, a buffer against future external shocks to the economy, and then take it to $77 billion in 2030.
COUPONS, TIME AND VALUE
The guidelines also call for a “substantial reduction” of coupons for the medium- to long-term “in order to restore the country’s ability to pay its interest bills on an ongoing and sustainable basis (without simply rolling debt over on international credit markets).”
Another proposal is to extend the maturities on the debt, gaining the economy time to recover and the small local capital markets to grow. The extensions could also include “possible reductions in the nominal face value of the eligible debt” as part of the strategy to improve the economy’s ability to handle adverse shocks, the government said.
There is also the potential of sweetening the deal. In the past, the government issued GDP-linked warrants in the 2005 and 2010 restructuring of defaulted bonds, and in a chat with local reporters late Wednesday, the minister said it could offer them in this deal as a “value recovery mechanism.”
A key in the restructure will be the exit yield, which the government said must be in line with a target of selling new medium- to long-term foreign currency debt at an average interest rate of 5% in real terms until 2034. If the exit yield is too high, then it may be necessary to offer “lower coupons, longer grace periods, longer maturity extensions, or larger reductions in nominal face values” in the restructuring, according to the document. Bondholders have been expecting a haircut of at least 40%.
Guzmán’s ministry also said that talks for a new financing program are ongoing with the International Monetary Fund (IMF), the country’s biggest creditor at $44 billion.
“We have been engaging constructively with the IMF and it is our intention to seek a new program that will allow the existing IMF loan to be refinanced until Argentina can access international debt markets at sustainable rates,” the government said.
Last month, Fernández said he would seek a five-year deferment on its payments to the IMF.
In the guidance, the government said the economy likely will shrink by 1% to 1.5% this year and return to growth in 2021 at 2.5% to 3%, a forecast that it said doesn’t take into account the impact of the coronavirus. The primary deficit of 1% of GDP in 2019 is expected to reach a balance as soon as 2022 and then gradually widen to a surplus of 0.8% to 1.2% in 2027. it said.