Walter Molano | Light beckons in debt negotiations
OP-ED CONTRIBUTION: EMERGING MARKET ADVISER
With less than a week to go until the grace period on the sovereign coupon payments elapses, there are signs that the government is entering into more serious negotiations with bondholders.
Economy Minister Martin Guzman retained his combative stance earlier last week, stating in a presentation that he had not received any counterproposals from bondholders. However, the Argentine press reported that counterproposals from the three leading bond groups were emailed by the end of the week.
More important, the Ministry of the Economy issued a communique on Friday night confirming the receipt of the three proposals and confirming that it was studying them. All three counterproposals provide cash flow relief and an extension of maturities, but they are not as severe as the government’s initial proposal.
As a result, the valuations of the counterproposals were in the mid-50s to low 60s, using an exit yield of 10 per cent. As we stressed many times in the past, the two positions were not so far apart.
While bondholders were willing to provide the country with some breathing space to regain market confidence and attend to the devastation produced by the COVID-19 pandemic, they had some minor demands. They wanted the recognition of the accrued interest, some coupon payment during the recovery period and a normalisation of coupon payments after the recovery, even if some of the coupon was paid in kind – PIK.
Such alterations would not have a meaningful impact on the government’s cash flow, but it would significantly boost the valuation of the bonds to an acceptable level.
One factor that is playing in the government’s favour is the inherent rift between bondholders. There are some inherent differences in preferences, but one of the biggest lines of demarcation is between holders of the exchange bonds, those instruments that had already been restructured in 2005 and 2010, and the so-called Macri bonds, which were issued after President Mauricio Macri was elected in 2015.
The difference is due to the underlying indentures. The exchange bonds’ indentures are much stronger, allowing holders to make a stronger claim. Therefore, they are demanding a higher valuation.
Although the government is playing a sudden-death game with the expiration of the grace period on May 22, the possibility that Argentina enters into default without an agreement is not a game changer. It will certainly trigger the credit default swaps, but they were going to be triggered anyway once the restructuring would be announced, since it will mark an alteration of the original debenture. Nevertheless, it will not derail the negotiations.
The real game changer is the acceleration of the bonds. This is where bondholders demand that all obligations be paid back in full, immediately. This is the instance where the cross-defaults are triggered.
However, bondholders will not accelerate if they are in the midst of a negotiation. The important thing for the government is to get this nightmare behind them, and to deal with the ongoing pandemic. Restructuring the debt will allow the Fernandez government to stabilise its parallel exchange rate, which is keeping the inflation rate unnecessarily high, as well as allow it to eventually regain access to the international capital markets.
Therefore, there seems to be light at the end of the tunnel. Fortunately, this time, the light is not of an oncoming freight train.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.