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Argentina: Reopening the Exchange

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Argentina's new debt proposal allows creditors to restructure their bonds and the government to access capital markets.

BY WALTER T. MOLANO

A week ago, President Cristina Fernandez de Kirchner announced that a bevy of three investment banks approached her with a proposal to restructure the remaining untendered debt. The Argentine government insisted that the proposal was unilaterally presented by the banks, and that it played no part in soliciting the plan—even though Buenos Aires settled its Paris Club debt only a few weeks earlier.

The new proposal achieves two major objectives. First, it reopens the deal, allowing the remaining creditors to restructure their bonds and remove the final impediments for the Argentine government to access the international capital markets. Second, it provides Buenos Aires with new money. Given the demise of the export tariff increase, the decline in soybean prices and the limitations of the Chavez window, it was clear that Argentina would soon have to retap the capital markets. However, the pending issue of the untendered debt was an impediment to any international capital markets activity. Therefore, it was obvious that the government would soon have to make a breakthrough on the untendered debt issue.   

GOVERNMENT CONCESSION

Two of the controversial demands made by the holdouts were the issuance of additional GDP warrants and the recognition of Past Due Interest (PDI), two conditions that the government initially said it would not meet. However, Buenos Aires conceded on both issues. In return half of the holdouts allegedly agreed to provide new money. Creditors will tender their old bonds, which are worth roughly 29 cents, plus 25 cents of new money for each 100 cents of defaulted bonds they tender. In return, creditors will receive 33.7 in Discounts. The Discounts will be under New York Law. The all-in value of the new Discounts will be about 83 percent; hence they will be worth 28 cents. Creditors will also receive 6.6 cents of PDI, which will also be paid in additional Discounts. Therefore, the PDI will be worth 5.5 cents. Last of all, creditors will receive 100 cents in GDP warrants--which are currently trading near 9 cents.  

Creditors will not be compensated for any of the GDP payments that were already made, nor will they be eligible for the payment that will be made at the end of this year. The reopening of the exchange requires legislation that will not be provided to the congress until October. Hence, the offer will probably not close until next year. Nevertheless, creditors should be compensated for the GDP growth that will be posted at the end of this year, which implies a payment of about 3.3 cents by the end of 2009. Therefore, the value of the deal will be the sum of the Discounts (28), PDI (5.5) and GDP Warrants (9), which is 42.50 cents.

NEW BOND

However, there is the new money bond—which is the trickiest part of the valuation. 

In order to get a deal that is superior to what most people imagined, creditors will have to subscribe to a new 10-year Argentine sovereign bond. The debenture will have a coupon of 12.5 percent. Unfortunately, the valuation of the instrument will be problematic. The yield on similar Argentine instruments range between 15 percent and 17 percent. Therefore, the new bonds will have to trade at a discount. How much of a discount is an academic exercise, because the risk premium should decline as Argentina repairs its relations with international investors. Therefore, depending on the exit yield of the new sovereign bonds, the exchange could be very attractive and provide investors with significant upside.

Walter Molano is head of research at BCP Securities. 

 

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