The Argentine debt proposal
AFTER MUCH anticipation, the government of Argentina launched its bond restructuring proposal on April 17.
The proposal divides the bonds into two general groups: the first consists of the eurobonds that were issued by the Macri administration; and the second includes the bonds that were exchanged in the previous restructuring.
The first group is subdivided into three subsets, short, medium and long-term maturities. The short bonds include the three issues that were to mature before the end of 2023. These new bonds will mature in 2030.
The medium-term bonds are the five bonds that mature between 2026 and 2036. These new bonds will mature in 2036.
The long-term bonds will be the three bonds that mature in 2046 and beyond. These new bonds will mature in 2047. The second group consists of the previously exchanged pars and discounts. The new pars will mature in 2039 and the new discounts in 2043.
The Argentine government’s idea is to present a consent solicitation to modify the indentures of the original bonds. On April 22, the government faced about US$500 million in debt service on three bond issues, which went into a 30-day grace period, creating a hardline for bondholders. However, the reality is that the government has the resources to make the payment. Therefore, it will not be a suddendeath situation.
All of the bond restructuring proposals commence with a threeyear grace period on coupons and amortisation. They then begin to pay semi-annual coupons in 2023, and they all are also amortising bonds.
The idea here is to smooth out the debt service schedule. However, one of the main objectives of the restructuring proposal is to regain access to the international capital markets. Therefore, the debt servicing schedule will eventually include new obligations.
All of the new bonds in the first group will commence with a 0.5 per cent annual coupon in 2023. The short-term bonds will step up to 1 per cent in 2026 and 1.75 per cent from 2028 to the maturity in 2030. The medium-term bonds will step up to 1.5 per cent in 2024, then to 2.75 per cent in 2026 and 3.875 in 2028 until the maturity in 2036. The long-term bonds will step up to 1.75 per cent in 2024, 3.75 per cent in 2026 and 4.75 per cent until maturity in 2047.
Last of all, the coupons on the pars and discounts will commence with a step-up coupon of 0.6 per cent. The pars will then pay 1.75 per cent in 2024, 4 per cent in 2026 and 4.5 per cent after 2028. The coupon on the discounts will step up to 3 per cent in 2024, 3.625 per cent in 2026 and 4.875 per cent from the second semester of 2029 until its maturity in 2043.
The pars and discounts will have no haircut, while the haircut on the short-term bonds will be 12 per cent versus 5 per cent for the medium and long-term bonds. Finally, all of the bonds will amortise, with the short-term bonds beginning in 2026, the medium bonds in 2031, the longterm bonds in 2028, the discounts in 2029 and the pars in 2030.
Our valuation, based on an exit yield of 10 per cent, gives us an NPV of 42 cents on the shortterm 2030 bonds, 38.7 cents on the medium-term 2036 bonds, 39 cents on the long-term 2047 bonds, 43.6 cents on the discounts and 42.3 cents on the pars.
Given that the government intends to do a consent solicitation, it will most likely provide some cash incentive upfront, which will increase the valuation of the offer. Nevertheless, the fact that the government is proposing to withhold coupons for three years is creating indifference with going into a hard default.
A look at the terms of the deal, and seeing the minimal haircuts, also confirms what we already knew – that the country does not have a solvency problem; it has a liquidity problem. Therefore, the restructuring should address the liquidity issue by providing shortterm relief, but then returning to the original terms as soon as possible.
By extending the very low coupons until maturity, the government is just taking advantage of the situation. Indeed, a look at the new debt service schedule reveals the light load. The debt service on the new restructured bonds in 2023 will only be US$360 million, US$1 billion in 2024 and 2025, US$3.9 billion in 2026 and US$4.4 billion in 2027.
In other words, President Fernandez will have about the same debt servicing obligations in all of the remaining years of his administration as the country currently has in one year. It is for this reason bondholders will not accept the proposal.
Fortunately, if the government acts in good faith, this could be an opening proposal for negotiation. Providing a token coupon payment of 1.0 per cent during the first three years would not be much of a burden on the government’s finances, and stepping it up afterwards to within reach of the original coupons would significantly improve its viability.
Moreover, bondholders still need to see a comprehensive economic plan to see how it will use the debt forgiveness to improve the state of the economy. Unfortunately, the International Monetary Fund is waiting to finish the debt restructuring, before moving ahead.