In Buenos Aires debt deal, perspective matters
LESS THAN a week after the Argentine government launched its debtrestructuring proposal, the Province of Buenos Aires made its own offer. The two deals are similar, in that they provide three years of grace period, followed by a step-up in coupon payments. The provincial offer is significantly better than the sovereign, but this is because the province’s debt load is much lighter. This suggests that the acceptance by bondholders may be higher, but it still provides a level of debt relief that is not commensurate with its ability to pay. A major line of demarcation in the offer will be the original indentures. One group of bonds was written on the old 2006 indenture. These include six US dollar- and euro-denominated issues. The four USD issues are the four per cent of 2020, the 10.875 per cent of 2021, the 9.625 per cent of 2028, and the four per cent of 2035. These total US$1.1 billion. The two eurodenominated issues are the four per cent of 2020 and four per cent of 2035. These total €672 million. The second group was for the bonds that were emitted under the 2015 indenture, which also include dollar-denominated and euro-denominated issues. The four USD issues are the 9.95 per cent of 2021, 6.5 per cent of 2023, 9.125 per cent of 2024, and the 7.785 per cent of 2027. These total US$4.6 billion. The single eurodenominated issue is the 5.375 per cent of 2023, which has an outstanding stock of €500 million. In general, bondholders will be offered two options, 2032 bonds or 2040 bonds, with varying haircuts of between 10 per cent and five per cent. The province caps the dollar-denominated 2032s at US$2.34 billion, or 40 per cent of the bonds, and the euro-denominated 2032s at €540 million, or 46 per cent of the bonds. Some of the offers will also include an Earned Interest, or EI, bond, with varying haircuts between 10 per cent and five per cent. The dollar EIs will pay an annual coupon of 1.1 per cent, and they will begin to accrue interest at the end of 2024 until the middle of 2040. Meanwhile, the euro-denominated EIs will pay an annual coupon of 0.95 per cent, and will begin to accrue interest at the end of 2024 until the end of 2040. Like the sovereign proposal, all of the bonds have a minimum grace period of three years and they employ a step-up coupon. However, the step-up in the provincial proposal is more generous. The dollar-denominated 2032s commence with a coupon of 0.5 per cent in the third year, but jumps to 2.5 per cent in 2023, and then goes to 3.5 per cent in 2028 until maturity. The eurodenominated 2032s commence with a coupon of 0.375 per cent in the third year, but then rises to 0.55 per cent in 2023 until 2028, and then goes to 2.0 per cent until maturity. The dollar-denominated 2040s commence with a coupon of 3.375 per cent in the third year and until the end of 2025, and it then increases to 5.375 per cent until it matures. The euro-denominated 2040 starts with a coupon of 2.25 per cent in the third year, and it will increase to 3.875 per cent in 2025 until maturity. Holders of the 2006 indenture USD bonds will have the option to exchange their bonds for the new 2032 and EI bonds, with a 10 per cent haircut, or the new 2040s and EIs, with a five per cent haircut. The holders of euro-denominated 2006 indenture bonds will have the same two options, except they will go into the new eurodenominated options. Holders of the 2015 indenture bonds will be given the same options, but without the EI bond. The valuations of the offers depend immensely on the exit yields. The current conventions are exit yields of 10 per cent and 12 per cent. Using an exit yield of 12 per cent, the 2006 indenture gives a valuation of 42.7 for the dollar bonds and 37.4 for the euro-denominated bonds. An exit yield of 10 per cent increases the valuation to 51.8 on the dollar bonds, and 44.1 for the euros. For the 2015 indenture, an exit yield of 12 per cent produces an NPV of 38.4 for the dollars and 33.8 for the euros. An exit yield of 10 per cent produces a level of 46.5 for the dollar bonds and 39.7 for the euro-denominated bonds. Although the provincial deal provides significant upside from earlier levels, they still represent a level of debt relief that is not commensurate with the provinces’ ability to pay. The main reason for this is the dramatic reduction in coupons, which are about half of what the province was paying. The acceptance of the proposal will be dependent on the entry point for the holders. For those investors who entered this year, when the bonds were trading below the sovereign, the deal provides enormous upside and will appear compelling. For investors who bought the bonds when they were issued, the deal will appear to be an opportunistic attempt by the province to walk away from its obligations. It is important to point out, however, that an exit yield of 10 per cent or 12 per cent may be too high. Some analysts point out that this was the exit yield during the last restructuring. However, Treasuries were also trading about 500 basis points higher. Exit yields are really spreads; and an appropriate spread for Argentina, post restructuring, should be around 600 to 700 basis points. This means that the valuations could be significantly higher.