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The key development this week has been the negotiation between
Argentina and its bondholders to find a mutually acceptable basis
for debt restructuring.
On 19 May, Economy Minister Martín Guzmán stated that there was
a "big chance" Argentina's revised deadline of 22 May for a deal -
which coincides with the end of the grace period on its unpaid
interest - is "extended so that …we can eventually make the
amendments that are necessary …to achieve a sustainable deal". He
made clear that "negotiations will continue". He previously had
announced on 15 May that there had been "positive dialogue" with
bondholders. Argentine media have published three counterproposals
from bondholders, which sought to shorten Argentina's grace period
to one from three years and reduce the degree of capital loss.
Temporary formal technical default nevertheless looks
increasingly likely unless bondholders agree a temporary payment
extension of the interest payments whose grace period expires on 22
May, but local media suggest that bondholders would not be able to
seek wider acceleration of Argentina's market liabilities for
several months, and in any case would be unlikely to do so while
negotiations continue.
Sentiment towards Argentine debt has been improving. Having
traded in late April at over 4000 basis points over comparable US
treasury bonds, on 15 May Argentina's EBMI+ spread breached 3000,
closing 6.7% tighter at 2837 basis points. During the week it
reached a low of 2690, suggesting positive investor sentiment over
the scope for a mutually acceptable deal.
Province of Buenos Aires failed to make a USD110 million payment
of principal and interest on dollar and Euro-denominated debt by
the expiry of the grace period on 14 May. According to Latin
Finance on 18 May, it now has a two-month period to agree a debt
restructuring deal with its creditors to resolve the technical
default, after which they can seek the acceleration of outstanding
issues. The Province is widely expected to align its position with
the outcome at sovereign level. Its stance caused little market
surprise: it was consistently viewed as unlikely to service
bondholders until the sovereign-level position is been
clarified.
Jamaica based Caribbean telecommunications company Digicel also
faces imminent default. On 19 May the company gave bondholders an
extra day to accept proposals to reduce its USD7 billion of debt
involving the write-off of USD1.6 billion. The Irish-owned company
already has obtained support from the majority of its bondholders
for restructuring, but reportedly has met resistance from holders
of its higher-ranked 2023 notes: it has improved an original offer
to exchange the 2023 debt for 2027 liabilities at 95% of nominal
value, versus 85% in an earlier proposal, to obtain their consent.
Digicel undertook another debt restructuring only a year ago,
extending the maturities of USD3 billion of its liabilities in due
in 2020 and 2022 by two years. Moody's has advised that the latest
distressed restructuring will count as a default event under its
criteria.
More positively, Abu Dhabi completed a USD3 billion tap of its
recently issued package of five, ten and 30-year debt sold in
April. According to Reuters, the tap gained some USD20 billion of
orders. It placed USD1 billion at each maturity, at 135 and 150
basis points over US Treasuries and at 3.25%, in line with the
earlier tranches: the final pricing was 30-35 basis points below
initial guidance.
Hong Kong Land has made its first bond sale for six years, a
USD600 million offering. The company, which operates prime real
estate in Hong Kong's Central district, has not been badly affected
by prior disturbances in Hong Kong, and has maintained a strong
balance sheet with a low gearing ratio of just 9% in April 2020.
However, the company has made a sizeable, USD4.4 billion commitment
to the West Bund development project in Shanghai, of which it plans
to retain 78%.
Other debt
Kingdom of Belgium launched a USD1 billion 10-year deal on 18
May, with initial price guidance of mid-swaps plus 37 basis points
area. On 19 May it announced that it had priced USD1.5 billion at a
36-basis point margin with a 1% coupon. The Kingdom's Debt Agency
announced that proceeds were swapped into Euros at a cost of
0.043%.
On 18 May it also auctioned 10, 11 and 30-year Euro-denominated
debt, sold at 0.024%, 0.096% and 0.728% respectively, with coverage
ratios of 2.83, 1.92 and 1.74 times the volume offered
respectively.
The UK launched its second syndicated gilt for COVID-related
funding. It placed GBP7 billion of 0.5% 2061 debt priced at
0.5852%, bringing total sales in the financial year since April to
GBP98.8 billion. UK buyers took 93% of the deal, which gained 159
orders worth GBP53.1 billion. A third syndicated sale is planned
for the first half of June. Sir Robert Stheeman, CEO of the UK DMO,
highlighted the very positive response to "two, back to back, and
large syndications in consecutive weeks".
French debt agency Agence France Trésor announced on 18 May that
it plans to "examine…the prospect of a syndicated issue" of a
20-year bond. The discussions will be held with its primary
dealers: it has not specified a timeline for issuance.
Romania has mandated banks for the sale of long five-year and
10-year Euro denominated benchmark issues.
Unédic, the body managing French unemployment payments, has
launched the largest ever social bond, a EUR 4 billion offering
designed to support its COVID-19 response. The November 2026 issue
gained EUR7.75 billion of demand excluding bookrunner interest.
Proceeds will be used to extend standard unemployment insurance
programmes and support an exceptional job retention scheme,
involving subsidized part-time work for over 12 million private
sector workers.
Asian Infrastructure Investment Bank has launched a five-year
dollar benchmark, with initial price guidance of mid-swaps plus 24
basis points. According to Reuters reports, it is also planning the
sale of CNY5 billion (USD703 million) of three-year Panda bonds
within China's domestic market.
The issuance follows the Beijing-based entity announcing plans
on 3 April to establish a USD5 billion facility for COVID-19
related funding, which it grew to USD10 billion on 17 April,
claiming that requests had far exceeded the initial amount
provided.
Implications and outlook
While there is a high likelihood of Argentina experiencing
technical default on 22 May, barring a last-minute deal to defer
the overdue payment, recent market performance clearly indicates
that investors have become more positive on the prospects for
negotiated settlement. This is likely to entail some fine tuning of
both the grace period and overall capital haircut. Overall, the
tone of Argentina's public comments has been encouraging,
suggesting that direction in the negotiations is positive.
Although the Province of Buenos Aires has triggered formal
default, this caused little surprise, as a provincial level
settlement is highly likely to reflect the eventual outcome at
sovereign level.
Digicel has been facing debt sustainability problems for an
extended period, after the company undertook rapid growth through
borrowing, while withdrawing a previously planned IPO. As such, its
potential default has been widely forecast and is causing little
market impact.
Elsewhere, Belgium's use of dollar funding, closely after
Finland undertook a similar exercise, has been shown to reflect an
effective arbitrage, with proceeds swapped back into Euros at
directly comparable cost to Euro-denominated auction costs, while
tapping a distinct investor base.
The UK's second syndication was less dramatically impressive
than its prior ten-year offering, but GBP53 billion "exceeded
previous records for a long conventional gilt syndication",
according to the UK's DMO. The far-higher domestic participation
reflects the long maturity, with natural support from UK pension
funds and life insurers seeking to balance long-dated
liabilities.
Posted 22 May 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit