“Argentina's debt burden: a new chapter in the same saga” article by Tomás Araya and Fermín Caride

Bomchil partners Tomás Araya and Fermín Caride set out the challenges the country faces and the options ahead for debtors and creditors.

Yet again, Argentina needs to alleviate its debt burden. The current macroeconomic and fiscal variables make it impossible for the country to meet its payments.

Argentina’s outstanding debt is approximately US$310 billion, of which one should distinguish so-called market debt (approximately US$170 billion) and non-market debt (approximately US$140 billion).

Market debt comprises bonds denominated in pesos subject to Argentine law, bonds denominated in US dollars subject to Argentine law, and bonds denominated in US dollars subject to foreign law. The latter – amounting to approximately US$66.8 billion – will be the most complicated to restructure.

Non-market debt includes debt with international financial institutions (with the IMF as the main creditor, owed approximately US$44 billion) and debt instruments issued by the Argentine Central Bank.

While the problem seems not to be the stock of debt (although it is important as it amounts to approximately 86% of GDP), Argentina may face a liquidity crisis because of its financial needs in the coming years (estimated to be US$24.3 billion in 2020, US$22 billion in 2021 and US$28.9 billion in 2022). This will likely require debt to be rolled over.

In terms of provincial debt, Buenos Aires looks to be the most vulnerable province. It faces maturity payments for 2020 exceeding US$1.6 billion (the first one – for US$250 million – is due on 17 January 2020).

Sovereign debt: current status and future prospects

There is a general consensus that Argentina’s external debt commitments need to be alleviated. The new Minister of the Economy, Martín Guzmán, is a research scholar from Columbia University who has written extensively about the negative effect of an excessive debt burden on achieving social and economic development.

To a certain extent, former president Macri already initiated this path in August 2018, when he announced a debt re-profiling programme. The programme included a mandatory extension of maturities of local short-term debt subject to local law and held by institutional investors, without a reduction in the face value of the debt.

On 17 December 2019, the new administration sent to Congress a draft bill of a public emergency law. The law, which would declare a public emergency on economic, financing, administrative and social matters, among others, proposed increasing export duties and creating new taxes, as well as entailing a broad delegation of powers to the executive to pursue, among others things, a renegotiation of external debt.

In terms of public debt, the draft bill authorises the executive to carry out the necessary measures to “recover and assure the sustainability of the public debt”. We understand this as a subtle way to allude to a renegotiation of public debt, which may (or may not) be voluntarily achieved with creditors. The draft bill also authorises the federal government to issue as much as US$4.6 billion of 10-year, dollar-denominated notes to the Argentine Central Bank in exchange for reserves in dollars that could only be used to pay dollar-denominated debt.

The actual terms of the proposal to the creditors are not yet known. It is expected that the process respects the generally accepted factors of any sovereign debt restructuring (transparency, impartiality, non-discrimination among the creditors and good faith negotiations).

Between the two possible options – the 2003 “Uruguayan” model, which lengthens maturities without imposing haircuts, and the 2005–2007 “Argentine” model, which implies a default and tough negotiations seeking large haircuts – President Fernández’s initial steps seem to be heading towards the first one.

In any case, a favourable debt sustainability analysis (DSA) of the Argentine public debt appears to be a precondition to any agreement with the bondholders. Typically, the entity in charge of performing DSAs is the IMF, which in this case may raise potential conflict of interest issues since it is Argentina’s largest creditor and normally enjoys a senior creditor status.

In our opinion, a fast process would be in the best interests of all involved parties and would provide Argentina with significant debt relief by postponing payments for the coming years. On the contrary, an aggressive proposal, wherein Argentina seeks haircuts on the face value, would probably cause original investors to assume the loss and sell the bonds to distressed funds, who are well known as tougher negotiators; therefore, the debt restructuring process would take longer, bringing negative effects to the economy.

The good news for Fernández is that approximately 61% of Argentina’s market debt is comprised of bonds or treasury bills (LETEs and inflation-linked bonds, among others) subject to Argentine law. This would allow the Republic to impose a mandatory restructuring of local bonds by passing an emergency law, following the example of Greece in 2012. This could be achieved if the draft bill of the emergency law is passed.

Additionally, a significant amount of the bonds are held by government agencies and local financial or insurance entities, which would have more flexibility to agree to a rollover, even if they have to accept a loss.

The other good news for Fernández is that – contrary to the last, traumatic Argentine debt restructuring process – outstanding foreign-law issued bonds include collective action clauses (CACs), therefore making it more difficult (and expensive) for holdout bondholders to acquire blocking positions. Most of the outstanding bonds include both “single-limb” and “two-limb” CACs, allowing the Republic to complete a successful restructuring if certain thresholds are reached.

What about the private sector?

In the private sector, the outstanding amount of corporate bonds is approximately US$20.6 billion, allocated in the oil and gas (US$8.9 billion), public utilities (US$5.9 billion), retail and consumer (US$1.8 billion) and banking (US$1.5 billion) sectors.

Particular attention should be given to public utilities companies, which are the ones most exposed to a change in government policies. They may be the first to suffer cash constraints that might make them unable to comply with debt servicing or financial covenants. It would not come as a surprise if these companies are first in line to launch liability management programmes, or directly initiate aggressive debt restructuring processes. Furthermore, public utilities companies in distress may face the risk of intervention from Argentine government agencies, as it has happened in the past. The draft bill of the emergency law moves in this direction, by mandating utility prices to remain unchanged and authorising the executive power to pursue a general renegotiation of the regulatory framework within 180 days.

Notwithstanding the fact that most of the corporate bonds are subject to foreign law and that – upon default – foreign bondholders would be entitled to initiate legal actions in the New York courts, the fact that we are dealing with local issuers gives a prominent role to Argentine law.

Generally, a local company with outstanding bonds would have the following alternatives to restructure its debt.

·         It could seek the bondholders’ consent to amend or waive certain terms and conditions of the outstanding bonds.

·         Or, it could launch an exchange offer, offering new bonds in exchange of the outstanding bonds.

·         Another option would be to seek an out-of-court agreement (known as acuerdo preventivo extrajudicial or APE).

·         Finally, it could file for a reorganisation procedure (concurso preventivo).

An amendment or waiver to the terms and conditions of the bonds would allow debtors to prevent or remedy any potential default situation. But Argentine bonds typically require unanimous consent to modify “relevant matters” (this unanimous consent was mandatory until recently), such as reducing the principal amount, postponing the stated maturity of any instalment of the principal, or reducing the interest rate. So although it is possible, amending or waiving certain terms and conditions of the bonds would not necessarily bring financial relief to corporate debtors. Likewise, unless supported by a vast majority of bondholders, this sole strategy would give leverage to non-consenting bondholders who have purchased the bonds at a discount and may press to collect 100% of the nominal value.

Debtors could choose to launch exchange offers under which new bonds with an extended maturity would be delivered in exchange for the outstanding bonds. This alternative would typically be paired with an exit consent solicitation, under which accepting bondholders would accept to strip the outstanding bonds from protective covenants to make them less attractive and induce most of the bondholders to accept the new bonds.

While there have been some examples of exit consents in Argentina in the past, courts have yet to opine on the legality of this instrument. Moreover, the main economics of the old bonds would remain in place since non-accepting bondholders could not be forced to accept new terms.

Given that the above options do not entail a solution with respect to all the bondholders, debtors may choose to present an exchange offering under the form of an APE proposal, which would allow the debtor to impose the terms and conditions of the exchange offer on all bondholders once judicial confirmation is granted.

To get a judicial confirmation of an APE, debtors must get acceptance from at least 50% of the creditors, which must, in turn, represent at least 66% of the outstanding unsecured liabilities. If that occurs, the exchange proposal (and the terms of the new bonds) would be binding on all bondholders, regardless of whether they have consented or not.

Alternatively, debtors may decide to file for reorganisation proceedings under the Argentine bankruptcy law, which would generate an immediate stay on all legal actions by creditors and would give the company an exclusivity term to negotiate a proposal with creditors. However, listed companies tend to avoid filing for reorganisation as reputational risk is still important in Argentina, and financing is sharply reduced upon a filing as there is no DIP financing available to debtors in concurso.

Playing a waiting game

As there are no substantial maturity payments due in 2020 under corporate bonds, we anticipate that in the coming months corporate debtors will adopt a wait-and-see approach until more light is shed on the strategy endorsed by the new administration for the debt renegotiation process with bondholders and the IMF.

Special attention should be given to public utilities companies with a heavy debt burden. These will face hard times if a new regulatory framework freezing tariffs and reinstating subsidies proposed by the emergency law is put in place.

If the new administration is successful in developing a macroeconomic plan that leads to a fiscal surplus – a precondition for a positive DSA – Argentina would be able to achieve a voluntary extension of the debt during the first quarter of 2020. If that is not the case and Argentina ends up in a longer debt restructuring process, it will be harder for the economy to recover, with negative consequences on foreign direct investment.

Under this scenario, hectic times would likely come to the private sector, with distressed funds acquiring debt blocking positions at a large discount and fighting fiercely for high recoveries through legal actions in New York and Buenos Aires. This would cause Argentine companies to follow APEs exchange offer strategies before local courts in order to minimise holdouts.

In any case, unless Argentina finds the path to achieve sustainable economic growth, debt restructuring will be a never-ending story.

Editor’s note: this article was written in December 2019.

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