Some of the world’s largest institutional investors are locked in a stand-off with Argentina over terms put forward by the government to restructure $65bn of foreign debt, as the cash-strapped country heads towards its ninth sovereign debt default.
On Wednesday, Buenos Aires skipped about $500m in scheduled payments on three foreign bonds, triggering a 30-day countdown to a formal default. The country’s proposal to reduce its huge debt burden landed with a thud last week, eliciting immediate objections from three groups that represent a large chunk of bondholders.
Asset managers BlackRock, Fidelity, Ashmore and T Rowe Price, which have joined forces with AllianceBernstein, Wellington Management and other institutional investors, criticised the government’s proposal to delay any debt payments until 2023, arguing that it places a “disproportionate share of Argentina’s longer-term adjustment efforts on the shoulders of international bondholders”.
Their criticisms were echoed by a creditor committee representing asset managers, mutual funds and other firms that counts Greylock Capital Management and GMO among its members, as well as a group of investors holding previously restructured bonds issued in 2005 and 2010, or so-called exchange bonds.
Argentina has proposed a 62 per cent “haircut” on interest payments, a reduction worth almost $38bn, as well as a 5.4 per cent cut to the face value of the debt, which is equivalent to roughly $3.6bn.
“Three years of zero payment is a non-starter,” said a member of one of the bondholder groups. “If the goodwill is there, they should make some effort to pay something.”
A coupon of just 1 per cent from 2021 would be “a huge psychological improvement”, said another source close to the negotiations.
Investors also bristled at the proposed size of the coupon payments from 2023. Argentina is set to pay out 0.5 per cent initially on most bonds, with the size increasing thereafter but reaching a ceiling below 5 per cent.
“To me there is a lot of room to make the offer much more palatable by increasing the coupon level,” said Alberto Bernal, chief emerging markets strategist at XP Investments.
Tweaks to Buenos Aires’ offer could get the deal done, said some investors. Michael Hugman, a portfolio manager at Investec Asset Management, said the “marginal” reduction to the face value of debt looked unnecessary given the meagre savings it generated compared with the coupon cuts. By scrapping the face-value cut and raising the coupons slightly, he argued, recovery values may rise to a level high enough to secure buy-in from bondholders.
According to analysts, the deal’s terms equate to an average recovery value for bonds issued after 2016 of 32 cents on the dollar, a historic low but in line with current pricing. For the exchange bonds, the average recovery value is slightly higher at 35 cents on the dollar, but trailing behind market prices.
Support from the three creditor groups is crucial to averting default. The government’s deal needs to obtain the approval of between 66 per cent and 85 per cent of creditors, depending on the bond.
The group including BlackRock claims its members hold more than 25 per cent of Argentina’s bonds issued since 2016 and more than 15 per cent of the exchange bonds. Meanwhile, the exchange bondholder group said it holds more than 16 per cent of the exchange bonds outstanding.
Bondholders have said they would accept payment mechanisms that would improve the value of the offer contingent on the growth of the economy, paying out more when the economy is performing well and less when it is doing poorly — as Argentina did in its 2005 restructuring.
But there are concerns about the government’s economic programme, with the creditor committee that includes Greylock calling out Argentina’s “inability to adhere to policies” that would allow it to “avoid the boom-bust cycle of debt restructurings”.
Economy minister Martín Guzmán has repeatedly insisted that Argentina cannot sweeten the terms on offer given the dire state of the economy. He has the backing of Fernanda Vallejos, an economist and a legislator in the ruling coalition, who said Argentina cannot accept an “unsustainable” deal. “Argentina is not going to sacrifice its people on the altar of its external debt,” she added.
Some creditors have pushed back on the assumptions used by the government to underpin its proposal, arguing that the long-term growth forecasts are far too low.
“It feels like Guzmán is riding an intellectual hobby horse with Argentina on the back, and they are both going over a cliff,” said one bondholder. “He is forgetting that if all the investors [walk] away there is going to be no deal at all.”
Creditors warn that another default for a country that has already seen eight will deter future investment. “You have the world’s largest asset managers [involved], so are you going to leave a bitter taste in these guys’ mouths?” said another bondholder. “Is that good for your country to really sting your biggest potential investors?”