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Wednesday, 23 April 2014

IMF/World Bank 2007: Turning over a new leaf?

Argentina was hit hard during the recent bout of volatility as investors with sizable positions sold liquid names. Corruption, manipulation of economic data and heavy near-term amortisations were all concerns. But the more market-friendly Cristina Kirchner could help the country regain credibility internationally when – as seems likely – she replaces her husband as president in October. Anthony Dovkants reports.

With its reputation somewhat tarnished and hedge funds retreating from what was once a favourite play, Argentine sovereign and corporate paper was severely battered during the August selloff. Five-year CDS, for example widened more than 360bp to 560bp versus pre-volatility levels.

It has been so bad that many agree that Argentine debt was essentially oversold over the summer. If the sovereign were to issue today it would have to pay on a peso-denominated bond about 400bp–500bp more than it did pre-volatility. It does not help that Argentina is also holding back its corporates, which have put off all issuance until January 2008 because of poor conditions and uncertainty ahead of October's presidential election.

Bankers see up to US$3bn worth of corporate supply locally and internationally getting under way early next year but in the near-term they remain pessimistic. The most bankers can hope for between now and January are a few local peso-denominated loans and some trust securitisations. That's nothing to write home about for a country needing to revamp its credit universe, and one that saw its corporates tap the international markets for about US$3.2bn earlier this year.

And yet change is in the air. There is an intense debate within the government about how to resolve the holdouts crisis. In short, many officials want Argentina to return to a path of credibility and respect within international markets. This is critical if Argentina is to bring down its relatively high borrowing costs.

So far outgoing president Nestor Kirchner has done little on this front, mostly because he would gain no political advantage by doing so. Many locals would see, or be led to see by the opposition, that such a move is nothing more than a give-away of hard earned Argentine money to a number of rich foreigners.

Kirchner has shown little respect for international investors during his presidency. Argentina’s US$103bn restructuring in 2005 was arguably one of the most painful ever for bondholders who had to swallow an estimated haircut of over 70%.

But there is hope and that optimism takes the form of Cristina Kirchner, the outgoing president's wife. The powerful senator of the ruling Peronist party, who is often likened to Eva Peron, has shown more interest in taking a market-friendly approach, leading bankers to conclude that an announcement toward resolving the holdouts crisis could come as soon as the first half of 2008.

Cristina Kirchner is expected to win easily in late October. She has already overcome a rough patch in her campaign when in June and July economy minister Felisa Miceli was forced to resign after a bag allegedly containing some US$240,000 was found in her office. The minister said part of the money was to buy a property.

Today, the senator is expected to win with 50% to 60% of the votes. In short, the opposition has failed to make a dent in her campaign. But no one really knows what she will do with regard to economic policy or the holdout crisis. Bankers say that they will get a better picture only after the election.

Should Cristina Kirchner try to win back the market she will have much to do. Regarding the US$19bn of holdouts, Argentina is only expected to offer pars and discounts to bondholders as it did the first time round. But the government is not expected to include GDP warrants into the package, given that it has already made it clear that it wouldn't offer more attractive terms than the original deal. Indeed it is likely to pay less, though some are hoping for a sweetener.

Even if Argentina sweetens the offer and pays more than it did the first time round – a move that would upset those who accepted the original restructuring – it is unlikely to gain 100% approval for its reopening. Some very big funds have made it very clear they want all of their money back, and some speculate that the crisis will not be resolved unless the government offers extremely generous terms.

"There are always going to be investors that will not get in and instead prefer to wait in the hope that they get everything back, so the holdouts issue will probably never go away," said a senior DCM banker in Buenos Aires.

Consequently, Argentina risks having to continue issuing its dollar and peso-denominated debt under local law as international investors will try to intervene in a Global issue via court orders and redirect proceeds at the clearing stage. As a result, Argentina has to adopt intricate and expensive mechanisms to circumvent such a possibility, making issuance expensive as well as risky and difficult.

That aside, Argentina will be looking to build out its peso-denominated external curve under local law. In early June, it finally met a key goal of issuing fixed-rate longer-term local currency bonds, albeit under local law, joining a growing club of LatAm issuers such as Brazil, Mexico, Uruguay and Colombia.

Argentina managed to beat difficult market conditions and place its first fixed-rate peso-denominated bond since its 2001 default, weighing in at nearly US$500m-equivalent following demand of US$1.71bn. At the time, the sovereign set its coupon at 10.50% before pricing it at a steep discount of 95.55 to yield 11.70%, falling in line with expectations of 11.50%–11.80%. It would like to come back and raise a further US$1bn equivalent on the five-year point.

Argentina has some US$750m worth of financing needs left for 2007 and it will be keen to issue more bonds again after relying on central bank loans. In July, it tried to reopen the bond for another US$500m but it was no longer possible as the yield was trading 40bp–70bp wide to reoffer and Argentina had to hold off or risk sparking fears about its financial health.

Once the programme for the five-year is completed, Argentina will turn its attention to extending along the curve to the 10-year point. The sovereign wanted to do this in June, but the move would have been too costly.

Aside from peso bonds, Argentina is also evaluating a series of liability management transactions and the creation of new Global dollar benchmarks, though the latter will not be possible unless it resolves the holdouts crisis first. A five-year in US dollars would be a modest start, but the sovereign would prefer to start at 10-year provided conditions and investor sentiment allow for it.

On the liability management front, the sovereign is keen to lighten its amortisation load, possibly swapping some of the more than US$11bn in outstanding Boden 2012s. The bond is a major drag on public finances at the short end of the curve, with some four years left to go before maturity. It is possible Argentina will swap its Boden 2012 into a new 10 or 15-year US dollar bond by coming to market with an initial US$500m.

The sovereign is looking at creating such points on its dollar curve to help extend maturities because the short end is heavily populated and carries too much risk, with more than US$18bn worth of largely expensive debt through its 11.75% 2009s, 11.375% 2010s, 7% 2011 Bonars, 12.375% 2012s, Boden 2012s, 7% 2013 Bonars, 11.75% 2015s, 11.375% 2017s, 12.25% 2018s and 12.125% 2019s.

Moreover, such bonds could either be issued under Argentine law or as Globals. A 10-year in dollars under local law already exists after Argentina issued its new 10-year Bonar X earlier this year at 7%, or 90.30 to yield 8.46%.

While the debate internally and externally rages as to what Argentina will do next, it is likely the next president will have a golden opportunity to rebuild the nation's reputation after it was tarnished by its unpopular restructuring when some two-thirds of its US$100bn worth of debt was wiped off its books.

Argentina has more external debt in circulation than the likes of Brazil, and could yet become LatAm's next sub-investment grade benchmark provided it comes to terms with the mistakes of the past.

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