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Capital Markets Weekly: Argentina seeks debt rescheduling
On 28 August recently-appointed Argentine Finance Minister Hernán Lacunza announced that Argentina plans to reschedule its international public and official liabilities. He attributed this to "short-term liquidity stresses" rather than "problems with the solvency of the debt." Argentina plans to defer USD7bn due on short-term local debt maturing in 2019, and plans "voluntary reprofiling" of its USD50 billion of longer-term debt and to reschedule USD44 billion of IMF funding.
Local media reports claim that the initiative was requested by the IMF to put Argentina debt onto a more sustainable basis, and that it had been a pre-condition for the Fund's latest release to Argentina.
There have been relatively few primary deals since our last blog, reflecting Labor Day and the UK Bank Holiday.
On 28 August, Germany sold a EUR2.335 billion 10-year auction, which cleared at -0.7% with EUR4.49 billion of demand. Up to EUR3 billion was offered, with the shortfall again indicating some investor resistance to the longer maturity at negative yields.
It was followed by the Republic of Finland with a EUR3 billion syndicated five-year deal. This attracted EUR13.6 billion of demand from over 80 investors. The deal priced at a 0% coupon and issue price of 103.775%, to yield -0.734%.
As one of the EU's highest yielding markets, Greece has benefitted from the ongoing search for yield: its 10-year bond yield reached a record low of 1.811% on 28 August (it now stands at 1.62%, on 3 September). The rally in Greek bonds has followed the country lifting its remaining capital controls from 1 September. On 29 August, Italy's 10-year yield closed at 0.98% after reports that a new government was being formed and has rallied further to 0.92%.
Elsewhere, an ING dated-subordinated offering gained over EUR2 billion of demand. It was followed by a Swiss Re USD1 billion perpetual, also strongly received, which priced at 4.25% to the initial five-year call. BBVA sold a USD1 billion AT1 deal which attracted demand of USD7.8 billion. Over 410 orders were obtained, and the issue was priced at 6.5%, 50 basis points below initial guidance. BBVA advised the final pricing equated to a 4% coupon in Euros after currency swap. Senior bank issues for HSBC France and Svenska Handelsbanken also gained market focus in case either became the first bank senior new issue priced at a negative yield, but the two issuers moved down the yield curve to avoid this.
Mexican mining firm Peñoles is marketing for a USD600 million issue, which it aims to price on 5 September, refinancing existing debt.
Implications and outlook
Over August, the EMBI+ Emerging Markets spread index widened by 18.11%. Turkey, whose margin rose 18.61% to 529 basis points, and Brazil, out 16.48% to 248 basis points were among the worst performers, with spread deterioration the norm during the month. However, no other country remotely came close to the 224% spread change for Argentina, which closed the month at a 2532 basis point margin, having stood at just 815 basis points on 1 August. So far, there no signs of panic selling across the asset class, nor of any other country beyond Argentina being singled out as a likely default risk.
Argentina had widely been expected to renegotiate its debt, and market levels already were discounting some restructuring. However, its timing surprised market participants, with many market commentators having expected formal renegotiation only after Argentina's October election. IHS Markit analysis already had suggested that restructuring would feature in the current administration's ongoing dialogue with the IMF.
The restructuring announcement implies that the Macri administration will extend maturity dates on the country's local bonds, while negotiating extensions on its international bonds and IMF obligations. Local institutional bondholders are obliged to exchange their bonds for longer term instruments under domestic legal initiatives. Individual citizens are exempted from this exchange.
As an adverse side-effect, the move has adverse liquidity implications for local bank holders of affected instruments, which also face increased deposit flight from clients seeking to reduce exposure to peso depreciation.
Following the Argentina's debt re-profiling plan Standard and Poor's Global Ratings downgraded the country's foreign and local currency sovereign credit rating to SD on the unilateral change in the terms of short-term debt. However, as the changes in the repayment terms came in effect immediately, S&P then upgraded Argentina's long-term sovereign credit rating to CCC- and its short-term sovereign credit rating to C. It is considerably less likely that its international credit default swaps will be triggered while it continues payments on its international debt, while seeking "voluntary" renegotiation of their terms.
On 1 September, the Argentine government also reinstated capital controls. A USD10,000 limit was set for individuals seeking to purchase foreign currency and transfer it outside the country, and an authorization request must be filed at the BCRA for all businesses and banks trying to transfer funds abroad for specified purposes including dividend payments and remittance of profits.
The move came after a sharp decline in Argentine reserves. On 30 August, these fell to USD54.1 billion, having declined USD12.2 billion since Argentina's restructuring announcement. According to Ámbito website, once commercial bank holdings with the Central Bank and other items with restricted use are excluded, Argentina would hold only some USD12-14 billion of liquid reserves available for further currency intervention.
We assess that Argentine renegotiation will focus on extending maturities and reducing near-term debt service burdens, rather than to write off liabilities altogether or subject them to sharp capital haircuts. At this stage, we would expect international investors to take a pragmatic stance to preserve the value of their exposures, but there is obviously no certainty on either the timing or the scope of completing voluntary exchange.
Unlike in the country's default in 2014, all its international issues now contain collective action clauses under New York Law, with a 75% threshold for individual issues and a 66% limit for restructuring of a group of issues. As such, the prior problems with "holdout" funds should be avoided, with Argentina needing to convince a qualifying majority of its bondholders.
Efforts to adjust the IMF facility also are pending. We'd assess that the IMF has large exposures and appears to have been a key driver in pushing Argentina to restore debt sustainability. An obvious point of upcoming sensitivity will be how much roll-back Argentina seeks on prior IMF policies, notably fiscal austerity, to revive its economy. If this were to extend under a new government to greater state control, further capital controls, and other interventionist actions, this would increase the risk of the IMF and Argentina facing a stand-off over the country's official liabilities, increasing outright default risks.
In summary, Argentina's forced restructuring of domestic institutional liabilities represented a "Selective Default" event, but do not yet represent full-scale sovereign default. Nevertheless, this is a clear risk, and Argentina bondholders already face severe capital losses, with its 100-year bond having lost well over half its capital value, and some short-dated bonds trading close to 60% yields.
Elsewhere, Germany's latest sale was again partially disappointing in terms of the amount raised, but it still raised over EUR2 billion at the impressively-negative yield of -0.7% for ten years, without doubt a highly favorable fiscal arrangement for the borrower. The heavy oversubscription for Finland's shorter dated deal showed that the longer maturities - unsurprisingly - generate greater investor hesitancy for negative-yield primary purchases.
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