Argentina finalised a US$65bn-plus bond restructuring last week when it garnered support from three major creditor groups, ending debt talks that had seemed doomed to fail earlier this year.
The government said in a statement that it had cut a deal with the Ad Hoc Group of Argentine Bondholders, the Argentina Creditor Committee and the Exchange Bondholder Group – as well as other "significant holders" of its bonds.
With the backing of the majority of bondholders, the deal involving an exchange from old into new bonds is considered done, though the government has extended the deadline to August 24 to give stragglers a chance to participate.
Not only was the deal one of the first major restructurings to be completed amid the Covid-19 pandemic, but it also tested the limits of the collective action clauses introduced into Argentina's bonds when it last restructured its debt in 2005 and designed to prevent a repeat performance of the country's subsequent ill-fated tussle with hold-outs.
Aside from net-present value calculations, the CACs were a particular sticking point for holders who feared that Argentina would abuse such clauses through a so-called Pac-Man strategy that would have seen it playing individual groups of investors against each other until it got the support it needed.
It is thought the indentures on the new bonds will help prevent such manoeuvres, though the government gave few details of the exact language in the new securities except to say it would "strengthen the effectiveness of the contractual framework".
"This is the first time that CACs really got tested," said Robert Koenigsberger, founder and CIO of Gramercy, and one of the funds involved in debt negotiations.
"I have my doubts about whether [the Pac-Man strategy] would have been used or whether it would have worked. We will never know. At the end of the day, the CACs worked the way they were designed to work."
Yet whether the changes in language in the new bonds from Argentina and Ecuador, which completed a similar process last week, set a precedent for the growing list of sovereigns facing restructurings in a post-Covid-19 downturn remains to be seen.
"As to whether this additional language will be included in CACs in new sovereign bonds, that is another matter," said Lee Buchheit, a leading sovereign debt lawyer.
"I personally hope it will not. I think it would be counterproductive to have multiple versions ... being used in the market."
Except under certain circumstances, Buchheit thinks the right approach would be for sovereigns to voluntarily forswear using Pac-Man type manoeuvres when restructuring their debt.
"If we start down the road of amending the clause each time someone figures out a clever new manoeuvre, the text could become excessively long," he said.
The Covid-19 pandemic also presented challenges for both sides as they sought to communicate their proposals in what was one of the first restructurings to be conducted over Zoom.
Talks between Argentina's economy minister and former academic Martin Guzman and some large institutional investors were seen as a learning experience, as many of those involved were not experienced in restructurings.
Zoom calls where a multitude of investors listened to the latest proposal from Guzman were simply inefficient and slowed debt talks, say some involved.
"I was shaking my head because that is not a negotiation. There are, like, 40 investors that all have to say their piece. [Investors] should have relied on their financial advisers to do that kind of work," said one person involved in the talks.
What finally pushed the deal past the finish line was the realisation that Argentina’s latest offer was its last – and that it had a credible Plan B, said Koenigsberger.
That Plan B involved cutting a deal with the IMF first using an updated debt sustainability analysis that incorporated the impact of the Covid-19 pandemic and then returning with a proposal to creditors that would have involved less generous terms.
“What was the Plan B for potential hold-outs?," asked Koenigsberger. "You may try to make another three points, but if you fail your assets were going to drop 20 to 25 points and you were going to have to litigate – and that costs lots of money.”
The decision to bring together last month all three major bondholder groups also served to push the deal past the finish line.
"In the end, those three came together because it was the end, and that created the necessary conditions for certainty of execution," said Koenigsberger.
END OF THE CENTURY
Markets certainly cheered the outcome, with Argentina's Century bonds leaping more than five points on the news to hit a high last week of 48.50.
Even so, secondary prices are still below net-present value calculations on the latest proposals, suggesting that investors continue to price in some deal risk and the broader economic challenges faced by the government.
"We reckon that the deal is worth [an NPV] of 54.8 on average with a 10% exit yield, which is half way between what our latest proposal was and what the government was offering," said Graham Stock, head of EM sovereign research at BlueBay Asset Management, one of the firms involved in the restructuring.
"There is a lot more to be done in terms of negotiations with the IMF and more clarity around the economic framework to be adopted. This is the end of the beginning rather than the end of the overall process of normalising relations with creditors."