The government’s debt offer was finally unveiled. New bonds’ NPV estimates are in the range 31-44 dollars (at 10-12% exit yield, depending on the bond) and NPV haircut ranges between 45% and 60%.
The offer does not look enough to reach CAC’s majorities, and many Bondholder Associations have already rejected them. However, the initial offer was higher than expected and better than what transpired from private meetings. The government, despite its take-it-or-leave-it rethoric, proved permeable to negotiation.
NPV haircut of the initial offering
% of exchanged bond NPV
From a historical perspective, the offer looks like an outlier. In 68 preemptive debt restructuring between 1978 and 2010 (See Asonuma & Trebesch 2015) average NPV haircut was 18.4%, the median 15.5 and the maximum 56.3%, The 50%/60% haircut on a pre-default scenario would put Argentina as a very atypical case, that does not seem grounded on macro imbalances. COVID outbreak looks like the perfect timing for extreme outcomes, but we still believe there Is room for a better offer.
Source: See Asonuma & Trebesch 2015)
On the positive side, the government has shifted its strategy to what looks more like a liquidity relief, rather than a solvency problem (as we explained in previous reports, see here and here). The offer seeks savings of USD 51bn over the decade in line with the IMF’s technical note (see here). Of course, from 2029 onwards the new debt structure implies higher payments and cumulative savings would be of USD 20bn by 2050.
Net USD Debt profile: Current vs Possible after the exchange
Despite the non-surprising hard-line stance, we believe that a deal may be closer than what it might appear. This baseline scenario is grounded on two beliefs (A) That Alberto Fernandez wants to avoid the default and (B) that the bondholders are willing to offer a grace period, delay capital payments beyond 2023 and lower coupons.
The road ahead looks bumpy. The government is cornering itself by not paying the AA21, AA26 and AA46 coupons on time and default remains a real possibility if politics sticks its tail. However, an angry-faced payment in May to gain time looks more likely than a default.