Three groups of creditors said Monday that they have turned down Argentina’s proposal to restructure $66.2 billion in foreign-law bonds, saying it won’t do enough to pull the country out of a boom-bust cycle and is too exacting on international bondholders. 

The rejection, however, is seen as the start of negotiations between two sides vying for the best they can get. 

The proposal, announced by the sovereign on Thursday with details released on Friday, “falls short” of what Argentina needs to put it “on a path toward sustainable growth and financial stability,” the Ad Hoc Bondholder Group said in a statement. 

The offer also puts “a disproportionate share of Argentina’s longer-term adjustment efforts on the shoulders of international bondholders,” said the group, which collectively holds more than 15% of the bonds in the exchange. 

The Ad Hoc Bondholder Group is made up of fund managers including AllianceBernstein, Amundi, Ashmore, BlackRock, BlueBay, Fidelity, T. Rowe Price, Western Asset Management, and Wellington. It is represented by international legal advisors White & Case. 

Argentine Economy Minister Martín Guzmán said the proposal will reduce debt payments by $41.5 billion and give the country time to pull out of a recession that is only expected to get worse as a result of the coronavirus pandemic. 

While he suggested that there is room for negotiations with the creditors, he also said this was the final offer. 

The proposal calls for a three-year grace period on capital and interest payments, a 62% discount in interest payments and a 5.4% reduction in capital payments, which combined would provide $41.5 billion in debt relief. If accepted, bondholders would swap 21 outstanding bonds for new notes that mature in 2030, 2036 and 2047. The new bonds, denominated in dollars and euros, will pay between 0.5% and 4.875% per year, for an average rate of 2.33% that will start to accrue on November 15, 2022. No payments of principal or interest will be made until 2023. 

The Ad Hoc Bondholder Group said it is in support of a restructuring plan that “defers near-term maturities and provides more than $40 billion of cash flow relief to Argentina in the coming years,” saying this would provide the sovereign with the “financial space” it needs to set the foundations for “longer term success,” including by using fiscal incentives to rebuild the economy.

Separately, the Ad Hoc Group of Argentina Exchange Bondholders (Exchange Bondholder Group), which holds over 16% of the country’s total sovereign bonds, said it understands “Argentina’s need for cash flow relief in the near term to address the shocks its economy has endured in recent years, including from the COVID-19 pandemic.” 

To make this happen, the group said in a statement it is willing to work with the government. 

But it said that instead of working constructively with bondholders, Argentina has made “a unilateral offer” that it considers to be “unacceptable” and unrealistic. 

“Argentina’s path to a more prosperous future requires active support and cooperation from all sides — international and local bondholders, the IMF [International Monetary Fund], World Bank and other multilateral and bilateral partners and Argentine society and its government,” the group said. 

A spokesman for the Exchange Bondholder Group declined to provide further comment on their rejection, and did not say which funds are involved in the group. 

The group is led by Monarch Alternative Capital, HBK Capital, Cyrus Capital Partners and VR Capital, and is being advised by Dennis Hranitzky at law firm Quinn Emanuel Urquhart & Sullivan, according to press reports in Argentina.

The third group, the Argentina Creditor Committee (ACC), which includes Greylock Capital, also said it cannot support the restructuring proposal because it lacks “substantiated forward-looking economic and financial information.” 

This information, which it said “must be anchored in concrete and feasible economic policies,” has not been readily made available from Argentina in what it called a “unilateral” offer. 

“The ACC considers that a broad set of bondholders would be prepared to make an equitable contribution through significant cash flow relief during the period that is needed for economic policies, including structural measures, to take hold,” it said. 

A key, it added, is for the government to put in place policies that would allow Argentina to emerge from the boom-bust cycles that have led it to debt crises in the past, including when it defaulted on nearly $100 billion in 2001.

Guzmán said the bondholders have 20 days to accept the proposal, adding in his presentation that he expects them to “play hard.”

In an interview published Sunday on the Argentine news website El Cohete a la Luna, the minister said Argentina “is already in a situation of virtual default” and that he wants to resolve the debt crisis “as quickly as possible” and “in a way that is most beneficial, ideally for all parties.”

The proposal, however, is neither favorable for bondholders, nor a guarantee that Argentina will reduce its debt by much or be able to return to borrowing on international capital markets, said Gabriel Torres, senior credit officer at Moody’s Investors Service.

The offer, as it stands, “will imply significant losses for investors,” Torres wrote in a statement.

If accepted, it “would give the government several years of fiscal flexibility without maturity of payments of principal and interest until 2023. However, the sovereign’s foreign currency obligations,” which also includes $44 billion owed to the IMF and other debts, “will continue to be significant, exceeding $100 billion,” he said. “Given its still high debt levels, Argentina will have to develop a viable medium-term fiscal and economic plan to be able to return to the markets once the grace period for debt repayment ends.”

Walter Molano, chief economist at BCP Securities in Greenwich, Connecticut, said there is room for Argentina to improve the proposal. The country, he said in a note to clients, doesn’t have a solvency problem, but a liquidity problem. “The restructuring should address the liquidity issue by providing short-term relief, but then returning to the original terms as soon as possible,” he said. 

If Argentina provides “a token coupon payment of 1%” during the three-year grace period, it wouldn’t be much of a burden on the government’s finances, but would help encourage acceptance, he said. Another improvement for bondholders would be to step up the coupon after the first three years “to within reach of the original coupons,” he added.

Alberto Bernal, chief strategist at XP Securities, a US-based securities broker, said he thinks there will be a negotiation going forward to improve the offer.

“This is like buying a car when you come and you offer something ridiculous, and then slowly but surely you start going into more logical prices,” he told LatinFinance. “It’s not going to be too hard to come up with alternatives to make the net present value of the transaction look more interesting. And if that’s the case, we will probably have white smoke in this situation at some point in the near future.”

Bernal said it is better for the government to reach a deal with the bondholders than to default. 

“It will only make your life much more complicated if you enter into a hard default situation,” he said.

That’s what Argentina is warning may happen. In a filing with the US Securities and Exchange Commission on Monday, Argentine Finance Secretary Diego Bastourre said if the restructuring offer is not accepted — or the debt relief is not sufficient, then Argentina “may not be able to continue regular payments on a portion or all of its indebtedness and faces a significant risk of default.” 

He warned that default could lead to “less favorable” conditions for bondholders than those in the offer. 

“In the future, the republic may not be able or willing to access international or domestic capital markets, and the republic’s ability to service its outstanding public debt could be adversely affected,” Bastourre said.

Argentina’s 4.625% January 2023 bond was bid down 0.75 points in price to 32.5, according to data provider Refinitiv. The 5.875% January 2028 bond, howeer, was bid up 1.812 points in price to 29.18, as of late Monday.