Argentina has reached an accord with its biggest creditors on terms for a restructuring of $65bn in foreign bonds, after a breakthrough in talks that had at times looked close to collapse since the country’s ninth debt default in May.
In a statement on Tuesday, the government said the agreement “will allow members of the creditor groups and such other holders to support Argentina’s debt restructuring proposal and grant Argentina significant debt relief”.
If it gains approval from enough investors, the deal means that the country can avoid potentially years of exclusion from capital markets as happened after Argentina’s catastrophic 2001 default. This triggered an acrimonious legal battle with so-called “holdout” bondholders that was not resolved until 2016.
Various bondholder groups have been negotiating with Buenos Aires since the leftist president Alberto Fernández took power in December, initially seeking far more sweeping debt relief than creditors were willing to countenance.
BlackRock, Ashmore, Fidelity and T Rowe Price were among members of the largest group, while hedge funds VR Capital Group and Monarch Alternative Capital were involved in a separate group. GMO was part of the smallest group. In order to apply greater pressure on the government, the three groups banded together in July, proposing new terms and penning a joint letter to Martín Guzmán, Argentina’s economy minister, highlighting their united front.
Mr Guzmán quickly rejected the latest proposals from some of those bondholders, arguing they would “subject Argentine society to more distress, and we are not going to do that”, but he has since agreed to make some debt payments sooner than expected — a concession that has led to a breakthrough.
In addition to tweaking the clauses of the new bonds that will replace the old defaulted debt to strengthen creditors’ hands in any future restructuring, “Argentina will adjust certain of the payment dates . . . without increasing the aggregate amount of principal payments or interest payments that Argentina commits to make while enhancing the value of the proposal for the creditor community,” the statement added.
The new terms suggest a recovery value of around 55 cents on the dollar — below the more than 60 cents on the dollar initially requested by certain creditors but exceeding the approximately 40 cents on the dollar recovery value first offered up by the government.
Bondholders will still need to vote on the deal, with a danger that some still decide to veto the recent agreement and scupper the debt workout. However, one person familiar with the negotiations suggested that was unlikely; creditor groups that have signed up to this offer represent around 50-60 per cent of eligible bonds, while Argentina already had support of about 30-35 per cent. That is comfortably enough support to change the terms of the bonds over the heads of objections by any holdout investors.
Assuming it is passed, the agreement opens up a new chapter in the debt negotiations. Argentina will now enter talks with the IMF after it lent $44bn since a currency crisis in 2018, seeking to delay debt payments coming due in 2021-23, while avoiding harsh austerity measures.
It will also allow the government to focus on fixing the rest of the economy’s many problems, which include one of the highest inflation rates in the world, capital controls that have led to a heavily overvalued official exchange rate, and a recession that is now well into its third year.
The Latin American country was already struggling with a deep recession and a huge debt burden when the coronavirus crisis erupted, sending the economy into a tailspin and further complicating the stand-off with bondholders.
“Argentina has done relatively well in dealing with the coronavirus versus Latin America in general, with early and strict lockdown measures. However, these measures have had profound economic costs,” Sebastian Rondeau, a Bank of America strategist, said in a note titled “Bouncing off the abyss” on Monday.
Mr Rondeau now predicts the economy will shrink 13.5 per cent this year, compared to a previous forecast of a 11.3 per cent contraction in economic output. “Economic activity is off the April lows but remains very depressed. The recent surge in (Covid-19) cases interrupted the recovery,” Mr Rondeau noted.
Argentina’s bond set to mature in 2028 rose over 3 per cent on Tuesday to 46 cents on the dollar, while the country’s century bond climbed by roughly the same degree.