Argentina is inching closer to a deal with bondholders after defaulting on its sovereign debt for a ninth time just over a week ago, with another government deadline approaching on Tuesday.
The country has been locked in a stand-off with creditors for months as it attempts to restructure $65bn of foreign debt. An initial proposal put forward by the government in April was rejected by three separate creditor groups, and after the expiry of a deadline on previously missed payments on May 22, the country tipped into default.
But optimism that a deal can be reached has risen over the past week, with the gap narrowing between the two sides after both the government and bondholders offered concessions. Many expect the Tuesday deadline to be extended, however, given that differences still remain between how much relief the country is seeking and what bondholders are willing to concede.
Argentina’s two largest creditor groups put forward a joint proposal at the end of the week that they said would result in more than $36bn of cash flow relief over the next nine years.
On Thursday the government also unveiled new terms, with payments to restart in 2022 compared to 2023 previously. It also increased the average coupon payment on the new bonds and reduced the proposed size of the principal haircut.
“We have come closer but there is still an important way to go,” said Martín Guzmán, economy minister, in a statement. He said the renewed creditor offer has “moved in the right direction . . . but it was insufficient”.
As such, negotiations are likely to continue beyond the Tuesday deadline. “It is more important to have the right deal than to have a deal on a specific timetable,” said a person familiar with the matter on the bondholder side.
“We have been as flexible as we could be in putting relief on the table,” added the person, describing June 2 as an “arbitrary” date.
Under the terms of the new creditor offer, no cash payments would be due until 2021. Then, the country would face cash coupon obligations starting as low as 0.75 per cent before rising to close to or above 6 per cent on some bonds. That is above the government’s proposal, which calls for coupon payments to eventually cap out below 5 per cent.
The bondholders say their proposal reduces coupon payments by roughly 32 per cent to an average size of 4.25 per cent, and they do not request any amortisation payments until 2025. But the groups do ask for non-cash payments beginning this year to cover unpaid interest under a so-called “paid-in-kind” structure starting at a rate of 1.75 per cent.
Brad Setser, senior fellow for international economics at the Council on Foreign Relations, warned that a paid-in-kind structure could eventually lead to a bigger debt stock for Argentina. He added that with only “slightly lower” coupon sizes under the bondholders’ proposal, there was a risk of “no real improvement in longer term solvency”.
BlackRock, Ashmore, Fidelity and T Rowe Price are among members of the biggest group. The second-largest group — comprised of holders of previously restructured bonds issued in 2005 and 2010, or so-called exchange bonds — involves hedge funds VR Capital Group, Monarch Alternative Capital and HBK Capital Management.
The groups say their combined holdings of the country’s exchange bonds total 31 per cent of the amount outstanding, while their members hold 32 per cent of Argentina’s bonds issued since 2016. Depending on the bond, the government needs the approval of between 66 per cent and 85 per cent of creditors to change any of the terms of its debt, meaning the two groups have sufficient positions to block a deal.
“The terms have been carefully designed to achieve equitable burden sharing by bondholders across all outstanding instruments,” the BlackRock-led group said in a statement on Friday. “We believe that the compelling rationale of our joint proposal should enable it to command widespread support from institutional and retail bondholders alike.”
The creditors are also requesting additional protections on the new bonds, stipulating in their proposal that the securities would be issued under terms that “substantially strengthen the legal rights and protections” of the holders. One bondholder said this could become a more central issue in the ongoing negotiations.
Argentina’s bonds have edged higher in recent days, signalling greater optimism among investors that a deal might be within reach. Bonds set to mature in 2028 have risen 4 cents since the country defaulted for the ninth time on May 22 and now sit at 37 cents on the dollar. Another bond coming due in 2033 has seen its price climb to 46 cents on the dollar, a level last seen in early March.
Mr Setser said there was pressure on both sides for a deal. “Argentina already lost market access long before its default, but the default certainly hasn’t enhanced confidence inside Argentina, its financial system or the currency,” he said.
On the other hand, “many creditors have the view that with limited near-term payments, there is not much downside to . . . waiting. I think that misses the substantial risk that the default becomes entrenched and when the Argentines return with a new offer, [it] may be less generous.”