Argentina is reaching an agreement with the bondholders after the non-payment of its sovereign debt just over a week ago.
The country has been trying for months to restructure its external debt for US $ 65,000 million. The first proposal presented by the government in April was rejected by three different groups of creditors, and after a grace period on defaulted payments had elapsed, on May 22 the country fell into default.
However, optimism over the possibility of a deal growing last week. Both sides of the negotiation moved closer together after both the government and bondholders offered some concessions. Still, many expect the deadline set for tomorrow to be postponed, as there are still differences between the relief the country is seeking and what creditors are willing to grant.
Argentina’s two largest creditor groups submitted a joint proposal late last week that they say would result in a cash flow relief of more than $ 36 billion for the next nine years.
The group warned that financial markets are “far from reality” and that action must be taken before investors include in their considerations the true cost of the pandemic.
On Thursday, the government also unveiled new terms, with payments set to restart in 2022 instead of 2023. It also increased the average coupon payment for the new bonds and reduced the proposed capital drawdown.
Bondholders say their proposal reduces coupon payments by about 32% to an average of 4.25%, and don’t ask for any amortization payments until 2025.
But the groups do want disbursements starting this year to cover unpaid interest under the so-called “payment in kind” structure, starting at a rate of 1.75%.
Brad Setser, an international economics researcher at the Council on Foreign Relations, warned that an in-kind payment structure could eventually lead to a higher debt stock for Argentina. He added that in the bondholders’ proposal, with coupons just “slightly lower”, there is a risk “that the long-term solvency does not really improve.”
BlackRock, Ashmore, Fidelity, and T Rowe Price are some of the members of the largest group.
The second largest group – made up of holders of already restructured bonds issued in 2005 and 2010, or so-called exchange bonds – includes hedge funds VR Capital Group, Monarch Alternative Capital and HBK Capital Management.
The groups argue that, combined, their swap bond holdings amount to 31% of the outstanding balance, while their members hold 32% of the Argentine bonds issued since 2016. Depending on the bond, the government needs approval from 66 % and 85% of creditors to modify any of the terms of their debt, which means that the two groups have sufficient positions to block an agreement.
“The terms have been carefully designed to achieve an equitable distribution of the peso by the bondholders of all the instruments in circulation,” the group led by BlackRock said in a statement on Friday. “We believe that the logic of our joint proposal should allow it to receive broad support from institutional and retail bondholders alike.”
Translation: Mariana Oriolo