Capital Markets Weekly: Ecuador and Argentina move closer to debt restructuring deals

This week's highlights include Ecuador announcing a restructuring package already accepted by around half its bondholders, Argentina's improved offer to creditors, El Salvador's long-dated dollar issuance and Oman exploring a USD2 billion bank bridge loan.

Emerging markets

On 6 July, Argentine filed an improved exchange offer for its bondholders, which led to sharp gains in internationally quoted equities and debt: the country's EMBI+ bond spread index traded down to 2388 basis points, its lowest level in four months. According to Ámbito newspaper, the new proposal implies a net present value of 53.5% on exchange, versus 40 and 47 percent in Argentina's two prior offers. The newspaper noted that the new proposal also permits holders of existing issues from 2005 and 2010 to retain the legal rights provided therein, rather than adjusting to the subsequent "anti-holdout" clauses introduced during the Macri administration, thus removing a key sticking point. For bondholders who accept the terms voluntarily, it offers the incentive of starting interest payments from late 2021, with coupons rising thereafter. Investors were granted until 4 August to accept the offer.

On the same day, Ecuador announced a preliminary agreement with key bondholders to restructure ten issues maturing between 2022 and 2030 into three new issues maturing in 2030, 2035 and 2040. In response, Ecuador's EMBI+ bond index fell by 15.13 percent from 3279 basis points to 2783 basis points over US Treasuries, versus its late-March high of 6063 b.p.

In a Twitter message, President Lenin Moreno claimed the deal would save USD16 billion over the next ten years, while the Finance Ministry referred to "significant relief". Media reports claim that among those accepting are high-profile investors including Ashmore, BlackRock, BlueBay and Wellington, with local newspaper El Comercio claiming that almost 50% of bondholders already accepted. The proposals still need to gain approval from a qualifying majority and negotiations are continuing.

The key proposals of the current restructuring involve:

• Reduction of capital from USD17.375 billion to USD15.835 billion, saving USD1.54 billion.
• Extension of the average life from 6.1 to 12.7 years.
• Five-year grace period for repayment of principal, and one year's grace on interest.
• Reduction of average interest cost from 9.2% to 5.3%.

Argentina's YPF announced an exchange offer to swap its USD1 billion 8.5% 2021 issue for USD950 billion of new 8.5% 2025 debt, plus USD50-100 million of cash. The larger sum of USD100 in cash per USD1000 bond is available for bondholders who accept by 16 July within a tender running till 30 July. The offer is conditional on gaining at least 70% acceptance. According to El Cronista website the new deal will amortize in four equal instalments from 2022.

On 8 July, El Salvador sold USD1 billion of 2052 debt at 9.5%, versus mid-9% area guidance. The deal significantly expands its international borrowings: Latin Finance cites Refinitiv data showing it previously had USD6.65 billion of outstanding public dollar debt. Since March it has borrowed just over USD1 billion from the IMF, Inter-American Development Bank and other official lenders, with a USD600 million CABEI loan deal still being negotiated. According to El Salvador.com, the bond sale attracted demand of USD1.6 billion.

On 6 July its central bank, Banco Central de Reserva, forecast that its GDP would decline between 6.5 and 8.5 percent in 2020, versus a March projection of a 2-4% decline. It also forecast a 12.9% drop in fiscal receipts, while government spending was projected growing 26.6% versus 2019 levels. Additionally, it noted that Q1 FDI reached only USD48.1 million, an 82% fall versus the USD256.9 million obtained in Q1 2019.

According to Reuters sources, Oman has started discussions with banks regarding a USD2 billion one- year bridge loan, pre-financing a bond issue. Such discussions also were held earlier in 2020 but stopped when market conditions deteriorated in March. Omani Finance Ministry sources declined to comment, while media commentary suggests bank proposals were submitted last week.

Romania/ Cyprus

Romania gained over USD7.3 billion in demand for 2031 and 2051 debt sales, selling USD3.3 billion of debt versus an initial reported target of USD2.5-3 billion. The two tranches were priced at 240 basis points over mid-swaps and 4%, versus initial guidance of 265 basis points and 4.25% respectively. Demand reached USD2.9 billion and USD4.4 billion, according to Bloomberg data. The deal is Romania's first dollar sale since 2018.

Cyprus continued the recent run of successful syndicated EU sovereign sales in Euros. It placed EUR500 million taps of both its 2024 and 2040 deals at 0.349% and 1.493% (70 and 140 basis points over mid-swaps), with demand of EUR 2 billion and EUR 3 billion respectively.

Leveraged finance

After 13 consecutive weeks on inflows with cumulative inflows of USD54 billion, US junk bond funds recorded USD3.4 billion of withdrawals in the week ending 1 July, according to EPFR Global data published by the Financial Times.

Despite this more cautious indicator, Thyssenkrupp's leveraged buyout was reported on 3 July to have attracted over EUR25 billion for the EUR10.3 billion bond and loan refinancing package.

ESG

BBVA has arranged the first Green AT1 issue. In its presentation it flagged that as of March 2020, the bank held EUR2.9 billion of Green assets, with 70% of this total having been accumulated since 2018. 49% of the Green portfolio is for renewable energy, 22% for clean transportation, and 19% for energy efficiency projects. While supporting such Green projects, proceeds also may refinance an existing AT1 issue first callable in April 2021. The EUR1 billion deal was priced at 6% to the initial 5.5-year call, versus initial price guidance of 6.5% area, after gaining EUR2.75 billion in demand.

Generali has completed its debut Tier 2 Green Bond with a very positive reception. The EUR600 million subordinated issue, which matures in July 2031, was priced at 2.429%, 255 basis points over mid-swaps. Demand reached EUR4.5 billion from over 350 accounts.

Our take

Both Ecuador and Argentina have made considerable progress towards agreed debt restructuring.

Ecuador's Economy Minister Roberto Martínez has specified that the deadline to accept the current proposal is 15 August. According to El Comercio newspaper, approval requires 66% approval from bondholders in all but Ecuador's 2024 issue, where the threshold for the collective action clause is 75%. Given the high-profile nature of those already supporting the proposals it appears close to achieving such approval.

Argentine media have flagged that the country has made considerable concessions to bondholders, moving from an initial net present value of around 40% with a three-year grace period to the current compromise. Local commentary recognizes, however, that Argentina had not obtained formal backing from two of the three organized bondholder groups when announcing its latest proposal, with suggestions that it would like to gain at least 50% acceptance and then hope that moral suasion and IMF pressure might encourage other key funds to sign up. In Argentina's favour is the relatively modest gap in valuation now seemingly separating the country from its creditors' demands.

El Salvador's deal was widely viewed as challenging for the market, given the country's B-/B3/B- rating with major rating agencies and its lengthy planned maturity. As such it is unsurprising that demand appears relatively modest and the coupon elevated in nominal terms.

Oman's bond trading levels have improved dramatically since March. Its 4.75% 2026 deal is now trading at around 93%, according data from Bourse Berlin, versus under 65% of nominal value in late March. This still implies a yield increase of around 1.5 percentage points from the over-par valuations the bond enjoyed in early 2020 but is nowhere near the debt-distressed levels seen in late March and April. Rather than paying a premium for issuance at present, Oman appears to be projecting further improvement in funding conditions by seeking a bridge loan with planned take-out within a year.

Both Cyprus and Romania have continued the strong recent reception for syndicated sovereign issuance, with Cyprus attracting almost double the demand volume it attracted in April when selling EUR1.75 billion of seven and 30-year debt. Even after accounting for yield-curve adjustment, the latest cost also looks attractive versus the 1.564% and 2.339% offer yields required for the prior sale.

Posted 09 July 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit