Bomchil partners Tomás Araya and Fermín
Caride set out the challenges the country faces and the options ahead for
debtors and creditors.
Yet again, Argentina needs to alleviate its debt burden. The
current macroeconomic and fiscal variables make it impossible for the country
to meet its payments.
Argentina’s outstanding debt is approximately US$310 billion, of
which one should distinguish so-called market debt (approximately US$170
billion) and non-market debt (approximately US$140 billion).
Market debt comprises bonds denominated in pesos subject to
Argentine law, bonds denominated in US dollars subject to Argentine law, and
bonds denominated in US dollars subject to foreign law. The latter – amounting
to approximately US$66.8 billion – will be the most complicated to restructure.
Non-market debt includes debt with international financial
institutions (with the IMF as the main creditor, owed approximately US$44
billion) and debt instruments issued by the Argentine Central Bank.
While the problem seems not to be the stock of debt (although it
is important as it amounts to approximately 86% of GDP), Argentina may face a
liquidity crisis because of its financial needs in the coming years (estimated
to be US$24.3 billion in 2020, US$22 billion in 2021 and US$28.9 billion in
2022). This will likely require debt to be rolled over.
In terms of provincial debt, Buenos Aires looks to be the most
vulnerable province. It faces maturity payments for 2020 exceeding US$1.6
billion (the first one – for US$250 million – is due on 17 January 2020).
Sovereign debt: current status and future prospects
is a general consensus that Argentina’s external debt commitments need to be
alleviated. The new Minister of the Economy, Martín Guzmán, is a research
scholar from Columbia University who has written extensively about the negative
effect of an excessive debt burden on achieving social and economic development.
a certain extent, former president Macri already initiated this path in August
2018, when he announced a debt re-profiling programme. The programme included a
mandatory extension of maturities of local short-term debt subject to local law
and held by institutional investors, without a reduction in the face value of
17 December 2019, the new administration sent to Congress a draft bill of a
public emergency law. The law, which would declare a public emergency on
economic, financing, administrative and social matters, among others, proposed
increasing export duties and creating new taxes, as well as entailing a broad
delegation of powers to the executive to pursue, among others things, a
renegotiation of external debt.
terms of public debt, the draft bill authorises the executive to carry out the
necessary measures to “recover and assure the sustainability of the public
debt”. We understand this as a subtle way to allude to a renegotiation of
public debt, which may (or may not) be voluntarily achieved with creditors. The
draft bill also authorises the federal government to issue as much as US$4.6
billion of 10-year, dollar-denominated notes to the Argentine Central Bank in
exchange for reserves in dollars that could only be used to pay
actual terms of the proposal to the creditors are not yet known. It is expected
that the process respects the generally accepted factors of any sovereign debt
restructuring (transparency, impartiality, non-discrimination among the
creditors and good faith negotiations).
the two possible options – the 2003 “Uruguayan” model, which lengthens
maturities without imposing haircuts, and the 2005–2007 “Argentine” model,
which implies a default and tough negotiations seeking large haircuts –
President Fernández’s initial steps seem to be heading towards the first one.
any case, a favourable debt sustainability analysis (DSA) of the Argentine
public debt appears to be a precondition to any agreement with the bondholders.
Typically, the entity in charge of performing DSAs is the IMF, which in this
case may raise potential conflict of interest issues since it is Argentina’s
largest creditor and normally enjoys a senior creditor status.
our opinion, a fast process would be in the best interests of all involved
parties and would provide Argentina with significant debt relief by postponing
payments for the coming years. On the contrary, an aggressive proposal, wherein
Argentina seeks haircuts on the face value, would probably cause original
investors to assume the loss and sell the bonds to distressed funds, who are
well known as tougher negotiators; therefore, the debt restructuring process would
take longer, bringing negative effects to the economy.
good news for Fernández is that approximately 61% of Argentina’s market debt is
comprised of bonds or treasury bills (LETEs and inflation-linked bonds, among
others) subject to Argentine law. This would allow the Republic to impose a
mandatory restructuring of local bonds by passing an emergency law, following
the example of Greece in 2012. This could be achieved if the draft bill of the
emergency law is passed.
a significant amount of the bonds are held by government agencies and local
financial or insurance entities, which would have more flexibility to agree to
a rollover, even if they have to accept a loss.
other good news for Fernández is that – contrary to the last, traumatic
Argentine debt restructuring process – outstanding foreign-law issued bonds
include collective action clauses (CACs), therefore making it more difficult
(and expensive) for holdout bondholders to acquire blocking positions. Most of
the outstanding bonds include both “single-limb” and “two-limb” CACs, allowing
the Republic to complete a successful restructuring if certain thresholds are
What about the private sector?
the private sector, the outstanding amount of corporate bonds is approximately
US$20.6 billion, allocated in the oil and gas (US$8.9 billion), public
utilities (US$5.9 billion), retail and consumer (US$1.8 billion) and banking
(US$1.5 billion) sectors.
attention should be given to public utilities companies, which are the ones
most exposed to a change in government policies. They may be the first to
suffer cash constraints that might make them unable to comply with debt
servicing or financial covenants. It would not come as a surprise if these
companies are first in line to launch liability management programmes, or
directly initiate aggressive debt restructuring processes. Furthermore, public
utilities companies in distress may face the risk of intervention from
Argentine government agencies, as it has happened in the past. The draft bill
of the emergency law moves in this direction, by mandating utility prices to
remain unchanged and authorising the executive power to pursue a general renegotiation
of the regulatory framework within 180 days.
the fact that most of the corporate bonds are subject to foreign law and that –
upon default – foreign bondholders would be entitled to initiate legal actions
in the New York courts, the fact that we are dealing with local issuers gives a
prominent role to Argentine law.
a local company with outstanding bonds would have the following alternatives to
restructure its debt.
could seek the bondholders’ consent to amend or waive certain terms and
conditions of the outstanding bonds.
it could launch an exchange offer, offering new bonds in exchange of the
option would be to seek an out-of-court agreement (known as acuerdo preventivo extrajudicial or APE).
it could file for a reorganisation procedure (concurso
amendment or waiver to the terms and conditions of the bonds would allow
debtors to prevent or remedy any potential default situation. But Argentine
bonds typically require unanimous consent to modify “relevant matters” (this
unanimous consent was mandatory until recently), such as reducing the principal
amount, postponing the stated maturity of any instalment of the principal, or
reducing the interest rate. So although it is possible, amending or waiving
certain terms and conditions of the bonds would not necessarily bring financial
relief to corporate debtors. Likewise, unless supported by a vast majority of
bondholders, this sole strategy would give leverage to non-consenting
bondholders who have purchased the bonds at a discount and may press to collect
100% of the nominal value.
could choose to launch exchange offers under which new bonds with an extended
maturity would be delivered in exchange for the outstanding bonds. This
alternative would typically be paired with an exit consent solicitation, under
which accepting bondholders would accept to strip the outstanding bonds from
protective covenants to make them less attractive and induce most of the
bondholders to accept the new bonds.
there have been some examples of exit consents in Argentina in the past, courts
have yet to opine on the legality of this instrument. Moreover, the main
economics of the old bonds would remain in place since non-accepting
bondholders could not be forced to accept new terms.
that the above options do not entail a solution with respect to all the
bondholders, debtors may choose to present an exchange offering under the form
of an APE proposal, which would allow the debtor to impose the terms and
conditions of the exchange offer on all bondholders once judicial confirmation
get a judicial confirmation of an APE, debtors must get acceptance from at
least 50% of the creditors, which must, in turn, represent at least 66% of the
outstanding unsecured liabilities. If that occurs, the exchange proposal (and
the terms of the new bonds) would be binding on all bondholders, regardless of
whether they have consented or not.
debtors may decide to file for reorganisation proceedings under the Argentine
bankruptcy law, which would generate an immediate stay on all legal actions by
creditors and would give the company an exclusivity term to negotiate a
proposal with creditors. However, listed companies tend to avoid filing for
reorganisation as reputational risk is still important in Argentina, and
financing is sharply reduced upon a filing as there is no DIP financing
available to debtors in concurso.
Playing a waiting game
there are no substantial maturity payments due in 2020 under corporate bonds,
we anticipate that in the coming months corporate debtors will adopt a
wait-and-see approach until more light is shed on the strategy endorsed by the
new administration for the debt renegotiation process with bondholders and the
attention should be given to public utilities companies with a heavy debt
burden. These will face hard times if a new regulatory framework freezing
tariffs and reinstating subsidies proposed by the emergency law is put in place.
the new administration is successful in developing a macroeconomic plan that
leads to a fiscal surplus – a precondition for a positive DSA – Argentina would
be able to achieve a voluntary extension of the debt during the first quarter
of 2020. If that is not the case and Argentina ends up in a longer debt
restructuring process, it will be harder for the economy to recover, with
negative consequences on foreign direct investment.
this scenario, hectic times would likely come to the private sector, with
distressed funds acquiring debt blocking positions at a large discount and
fighting fiercely for high recoveries through legal actions in New York and
Buenos Aires. This would cause Argentine companies to follow APEs exchange
offer strategies before local courts in order to minimise holdouts.
any case, unless Argentina finds the path to achieve sustainable economic
growth, debt restructuring will be a never-ending story.
Editor’s note: this article was written in
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