Argentina has gained breathing room after restructuring almost the entirety of $65 billion in foreign bonds, though it now faces a huge challenge to revive growth and repair government finances before the oxygen runs out.
The South American grains producer said on Monday it had restructured 99% of eligible bonds in its debt deal after almost all bondholders got on board, a major win for Argentina, which is mired in recession and default.
The country has also converted $8 billion in local dollar debt through voluntary swaps and is near the finish line to restructure over $40 billion in local-law dollar borrowings.
“Taken together, these deals will give the government some much-need respite as it tackles the devastating fallout from the coronavirus crisis,” Nikhil Sanghani at Capital Economics said in a note after the deal.
He added, however, that Argentina’s dollar debt remained high and the risk of another default would rise over time, especially with weak reserves, downward pressure on the peso and stubborn inflation.
“The bottom line is that Argentina’s public debt is no longer a near-term concern. But it is likely to rear its ugly head within a few years,” Sanghani said.
First on the agenda will be the local-law dollar debt swap, sorting out provincial debt restructurings and turning attention to negotiating a new deal with the International Monetary Fund to replace a failed $57 billion facility from 2018.
The government is also set this month to lay out its budget for 2021, which will give some idea of its plan to revive an economy likely to contract around 12.5% this year, the third straight year of recession.
“It is up to Argentina, to the current administration to come up with a program that reignites growth for their country, and that’s going to be challenging,” said Eric Baurmeister, a senior portfolio manager at Morgan Stanley Investment Management and head of its emerging markets debt team.
SHUT OUT OF MARKETS
Without a clear economic program, Baurmeister said, yields on the country’s new sovereign bonds, set to be issued on Sept. 4, will be elevated, given the perception of risk.
“The yields will be high, they’ll be effectively shut out of the external markets for a very long period of time,” he added.
Investors are looking at the new bonds’ exit yield when they start trading, which people said would be between 10%-12%.
Argentine bonds, which crashed last year, have climbed over recent days in thin trading, with most of those involved in the restructuring at between 40-50 cents on the dollar. The offer had an average valuation of 54.8 cents at a 10% exit yield.
The deal also opens the door for Argentina to escape from its ninth sovereign default after it missed a bond payment in May, though ratings agencies said they were watching to see what happened with the local restructuring.
“We’re waiting on the results of both debt exchanges, external and local, to assess if Argentina has cured its default and what its exit rating will be,” said Todd Martinez, director of Latin America sovereigns at Fitch Ratings.
Lisa Schineller from S&P said the agency could move on the question of default and ratings once the new bonds were issued and the local law debt resolved.
“Upon settlement, we could raise the issuer’s credit ratings and assign new credit ratings to bonds,” she said, adding that those tended to be B- or CCC category.
“We would have to look at the new profile, the new policy stance. The perception that there were greater risks would keep it more in a CCC category,” she added.