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Capital Markets Weekly: Latin American debt restructurings at risk of stand-off with investors 

23 July 2020 Brian Lawson

In a quieter week, this week's key developments were problems in the debt restructuring efforts of Argentina and Ecuador, along with Lithuania's new low cost for 30-year Euro-denominated borrowings.

Argentina/ Ecuador debt restructurings

In a Financial Times interview on 19 July, Alberto Fernández, Argentina's President, warned that "there is not going to be another offer" even if the country's latest debt restructuring proposal were rejected by the majority of international bondholders, stressing that "we can't do any more". He warned that any more generous terms would put the country's debt service ability at future risk.

In response, on 20 July, bond bondholder groups representing Argentina's creditors claiming to own more than one-third of the outstanding debt, submitted a joint proposal of their own, described in media commentary as worth 55 percent of nominal value of its existing debt. One of the three groups, the Argentina Creditor Committee, previously had indicated it would accept Argentina's latest offer and has now reversed this position.

Argentine Economy Minister Martin Guzmán promptly rejected the new bondholder proposal, claiming that it would "subject Argentine society to more distress" and that the country's latest offer was its final position. President Fernández also reacted, stating that Argentina would continue negotiating, but that it was "impossible that we could adjust the last effort we made" and that the government did not wish to make an offer that "would threaten more vulnerable sectors" domestically.

Argentina also has submitted to its Congress proposals to restructure USD46 billion of bills and bonds issued under domestic law. Of these, USDS25.5 billion are reported to be privately held while USD20.7 billion are held by public sector entities such as the ANSES social security fund. According to El Cronista, the offer will be made to holders of twelve series of dollar-denominated bills, nine BONAR issues and others maturing in 2033 and 2038.

The proposals offer two local currency bonds maturing in 2026 and 2028 and five new dollar bonds with maturities between 2030 and 2041. According to El Cronista, the latter will offer a nominal 0.125% coupon in 2021 rising to peak levels of 5%. For those exchanging into new dollar instruments, their prior holdings would be exchanged at between 58.2% and 97% of nominal value, with a capital haircut applied in all exchanges. The peso securities would be inflation linked.

According to the reports, the domestic proposal is voluntary, and designed to relieve near-term debt service, with the capital reductions also representing a reduction in overall liabilities. The provision of local currency tranches is also designed to facilitate future debt service.

Meanwhile, Ecuador issued a statement on 21 July, in which it has toughened its prior stance. The statement claimed that 53% of its bondholders have signed up to the Ad Hoc Group that has accepted its prior proposals, while claiming that it has "neared 60% acceptance" once informal support from other bondholders is included. It also notes that the IMF, World Bank and other official bodies have backed its prior offer.

By contrast, it described a counterproposal from BroadSpan Capital, UBS and others as calling for "an enormous economic sacrifice by the Ecuadorian people" and requiring a very high cost for planned provision of USD500-600 million of new lending. It claims this would involve a "dear cost" of 9.5%, versus the 6.9% proposed in the existing offer, and that additional debt service requirements in the counter-proposal would consume almost half of the country's social assistance programmes. Overall, it describes the counter-offer as "too burdensome" and warns it would "dramatically erode our efforts to restore debt sustainability". Finally, it flags that "Ecuador will not make concessions to bond holders only seeking to derail" debt renegotiation, through a "lose-lose" proposition, and calls for more of the outstanding minority of bondholders to accept its prior proposals.

Emerging markets debt issuance

Lithuania launched a Euro-denominated 30-year deal on 21 July. Reportedly targeting EUR1.5 billion, the offering quickly gained EUR4 billion in demand. It sold EUR1.75 billion, priced with a 0.5% coupon and issue price of 96.27% to yield 0.637%. In April it raised a record EUR2 billion in five and ten-year debt, placed at yields of 0.345% and 0.829% respectively.

In its deal statement, Lithuania highlights that the coupon was "the lowest ever" it has achieved for the maturity, being "more than three times smaller if compared to previous Eurobonds" of comparable term, according to Vilius Šapoka, the Minister of Finance. The Ministry's statement noted that the country had paid coupons of 2.1% and 1.625% for 30-year issuance in 2017 and 2019 respectively. Proceeds are for general financing purposes but will cover a USD1.35 billion redemption due in 2021.

On 22 July, Ukraine's Ministry of Finance reappointed banks for its planned issue of 2033 debt and an associated switch tender for outstanding 2021 and 2022 debt. The operation was postponed after pricing at the start of July following the resignation of prior central bank governor Yakiv Smoliy. Books opened on 23 July with initial guidance at 7.75%. When previously launched, the operation had priced at 7.3%, with USD1.75 billion size (and the initial guidance does not preclude a similar end-outcome). Having started July at 6 percentage points over US treasuries, Ukraine's EMBI+ index surged to over 7 percent after the resignation, but has since recovered to 6.2%, almost half the late-Match peak, but more than 2.5 percent above its 2020 low.

Braskem, the Brazilian petrochemicals firm, has completed its planned hybrid deal. It raised USD600 million of sixty-year debt priced at 8.5% to the five-year initial call (822 basis points over US Treasuries) versus high-8% initial guidance.

Other debt

The EU's budgetary agreement and compromise on grants and loans has permitted Italian two-year BTPs to trade at slightly-negative yields.

The UK has announced plans to raise a further GBP110 billion by end November, bringing its total 2020/21 funding to GBP385 billion. The UK Debt Management Office has slated 38 sales between September and November, including two further syndications.

European banks have continued with sales of perpetual debt, with UBS raising USD750 million of dollar-denominated AT1, while Raiffeissen Bank International targeted EUR500 million of Euro-denominated perpetual debt first callable in June 2026. The latter issue was priced at 6%, with the bank's statement reporting demand of EUR1.6 billion.

Implications and outlook

Sovereign debt restructurings tend to be complicated exercises, and Ecuador's position highlights that even where a process starts constructively, there is ample scope for subsequent disagreement. It previously has obtained the support of many highly-prestigious firms as well as backing from supranational and official bodies, and does seem quite close to gaining qualifying majorities, although this by no means precludes future blockages.

Argentina's debt negotiations appear quite finely poised: in its favour is the relatively modest gap between the most recent proposals, but its refusal to make any further adjustment still leaves the risk of potential stand-off with its creditors, and a hard default.

The EU's grant and loan deal is a clear positive for more financially-stressed EU states, as indicated by the Italian yield curve moving into negative yield territory out to two years, and with those for Portugal and Spain providing negative returns up to six years. With this support and continued quantitative easing, peripheral EU debt now appears likely to enjoy strong and extended underpinning.

Lithuania's bond was a clear success and represents a further example of the recent "long duration" bid. It has funded well below the cost incurred in prior 30-year issuance. The funding levels also highlight the questionable value of some index classifications: the IMF deemed Lithuania to be a mature market some years ago but this is not reflected on other commercial indices. Its pricing clearly belongs in "high-grade" territory, rather than being aligned with wider emerging market returns.

Posted 23 July 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit



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