More than eight years after it defaulted on some $82 billion of debt, Argentina soon hopes to close one of the most wretched chapters in its history as it reopens its controversial restructuring offer to recalcitrant investors.
The first deal in June 2005, which paid 33.7 cents on the dollar, was taken up by 76% of bondholders. Since then the 24% of investors that stayed out – predominantly hedge funds but also retail accounts – have taken drastic measures to recoup the full value of the bonds, including filing lawsuits in the US courts and making claims on Argentine assets. Initially the Argentine government, led at the time by Néstor Kirchner, refused to contemplate reopening the offer and ordered Congress to pass a law to forbid it happening.
The impasse meant that Argentina was blocked from issuing debt in the international capital markets. For a while that didn’t matter. Argentina raised money by selling $8.5 billion of debt in the local markets. It also borrowed $7.6 billion from its oil-rich neighbour, Venezuela. And after shrinking by more than 10% after the government’s default, the economy revived in the following years, with growth peaking at 8.7% in 2007.
But the economic crisis has changed everything. Argentina has a hole in its budget of up to $7 billion and debt obligations of $13 billion this year. And with an election due next year the government, now led by Cristina Kirchner, Néstor’s wife, cannot afford to remain isolated from the world’s markets if it is to meet its spending commitments. That’s why it is reopening the exchange.
The terms of the offer are, on the whole, similar to those of the 2005 deal. Institutional investors, for instance, will have to accept repayment at 33.7% of the face value of the defaulted bonds. Analysts at RBC Capital Markets reckon, however, that the market value of the dollar debt is 50 cents and the euro debt 43 cents.
In addition, the government will issue a new 10-year bond, with an 8.75% coupon, to cover accrued interest since December 2003. It will also offer new securities linked to economic growth although the proposal excludes past payments on GDP warrants.
Even if bondholders come back on side, Argentina faces paying exorbitant rates for its debt each time it taps the capital markets. The government wants to pay less than 10% in interest on any new bond but that will be a tough proposition given that Argentina is the world’s second-riskiest sovereign credit after Venezuela, with its five-year CDS trading at 900 basis points.
The debt exchange might lead to a slight tightening of yields but the sovereign’s borrowing costs will remain high unless the government cleans up its act and curbs its increasingly autocratic ways. Investors won’t be holding their breath.
