Refinancing of Argentina’s public debt
On 6th April 2020 a Decree of Necessity and Urgency (DNU for its initials in Spanish) N°346/2020 has been published by the Argentine Official Gazette.
This provision sets the deferral of payments of interest services and principal amortizations of the national public debt instrumented by titles denominated in United States dollars issued under the law of the Argentine Republic until December 31 2020, or until the date prior to the Ministry of Economy determines, considering the degree of progress and execution of the process of restoration of the sustainability of public debt.
According to this new measure, the local law payments involve about US$ 8,400 million dollars while the foreign law payments are paid unchanged.
For now, the payments of the bonds issued under foreign law, which are securities for US$ 69,000 million dollars, will normally be maintained by the National Authority due to having entered into substantive negotiations with the bondholders.
The goals are to impose a unilateral decision on local creditors, so a unilateral decision on local creditors so that it is very difficult to litigate against the Argentine State in national courts and to gain time to reach some type of agreement with foreign creditors.
The outbreak of the pandemic has disrupted the negotiations, and despite the collapse in bond prices it is clear that the bondholders are not willing to accept any offer.
The risk of insisting on an aggressive offer is that the necessary support will not be reached and Argentina will fall into an event of default.
This situation is caused by the fact of not complying in time and form with the original terms of the issuance of the now reprofiled bonds.
On the one hand, the extension of the negotiations forces Argentina to pay on April 22, about US$ 504 million dollars for coupons of foreign law bonds; such as “Global 2021”, “Global 2026” and “Global 2046” in the context in which payments are made on time and under the original terms. On the other hand, it is necessary to postpone immediately the significant payment of a bond called “ Bonar 2020,” which will expire on April 8 for an amount of 118 million dollars, and in the same way a capital quota of another bond called “Bonar 2024,” whose maturity date will be on May 15 for about 1,500 million dollars. Other bonds included in the national public debt are: Discount Ley Argentina, Par Ley Argentina and Letters of the Treasury.
What is striking, however, is that the Government sent the notice of payment for the bond “Bonar 2020” to the Stock Exchange, and to the Caja de Valores on March 31, which was due to be done this Thursday.
Local law maturities for this year are close to $ 8,400 million dollars, including the intra-public sector debt. In foreign law, some 3,300 million dollars remain to be paid this year.
The decision announced by the Government will surely have a negative impact on the prices of local law bonds, but could improve the valuations of foreign law bonds. The strategy seems to be to play for time for a better settlement later, while respecting the payment of interests.
In addition, the following public debt instruments issued under the law of the Argentine Republic denominated in United States dollars are exempt from the deferral provided:
(i) Non-transferable bills denominated in United States dollars held by the Central Bank of the Argentine Republic, including those issued under article 61 of Law No. 27,541, and bills subscribed directly by the Sustainability Guarantee Fund of the Integrated System Argentine Pension of the National Administration of Social Security.
(ii) Letters issued pursuant to Decree No. 668/19.
(iii) Treasury Bills issued by Joint Resolution No. 57/19 of the Secretariat of Finance and the Secretariat of Finance.
(iv) Treasury Bills in United States Dollars issued through Joint Resolution No. 17/18 of the Secretariat of Finance and the Secretariat of the Treasury.
(v) “NATURAL GAS PROGRAM BONDS”, issued through Joint Resolution No. 21/19 of the Secretariat of Finance and the Secretariat of the Treasury.
(vi) Treasury Bills in Guarantee issued through Resolution No. 147-E / 17 of the former Ministry of Finance and Joint Resolution No. 32/18 of the Secretariat.
Besides, the Ministry of Economy is authorized to carry out the operations of administration of liabilities and / or exchanges and / or restructuring of the securities, whose payments are deferred by virtue of the provisions herein, in order to recover and ensure the sustainability of public debt, which must be compatible with the recovery of the productive economy and with the improvement of basic social indicators, in accordance with the provisions of subsection a) of article 2 of Law No. 27,541 on Social Solidarity and Productive Reactivation in the Framework of the Public Emergency.
Finally, the payments of interest services and capital amortizations of the titles mentioned in paragraphs (i) and (ii) above will be replaced, on the due date, by new public titles, whose conditions will be defined, jointly, by the Secretariat of Finance and the Secretariat of the Treasury dependent on the Ministry of Economy.
One first conclusion is that those who hold securities under local law know that they do not have the same legal protection as those with bonds under foreign law, if you look at how local and foreign courts have treated the issue from 2002 onwards. Notwithstanding, these circumstances could enable different claims related to a cross default on their holdings of bonds under foreign law.
The economist Fernando Marull said “it is a cabotage default, and it is bad, but it was already discounted in bond prices, so it shouldn’t have a huge impact on the market. Now the most important thing is what happens with the renegotiation of the debt Foreign Law. An international default is more serious. If the Government decides to make a good offer that allows an agreement, it will avoid the default, but directly it does not make sense to pay what is due, only to fall into default anyway”.
In the same position, Miguel Kiguel of the consulting firm Econviews Econviews considers that “the market does not see the reprofiling of local debt as a threat to the restructuring of foreign debt”.
On the other hand, Siobhan Morden from Armerst Pierpont Securities considers that “the team (led by the Ministry of Economy) can look for an alternative solution and request a temporary suspension of debt payments. We assume little goodwill from investors to grant temporary relief. Current relations are strained after the recent move towards a more aggressive debt restructuring proposal.”