Much has been made of Argentina's audacity in following its record-breaking $102bn default on principal and past-due interest with the worst terms ever offered in a sovereign debt restructuring.
Less has been said about how much of a windfall the restructuring provided — for everyone except those who refused to take part in it. Danielle Robinson reports.
In July, just a few weeks after finally settling its February swap of $62.3bn of old defaulted bonds for $35.3bn of new par bonds, discounts and quasi-pars, Argentina was back in the market, taking orders from foreign investors for domestic dollar and peso bond issues.
By August the sovereign had sold $850m of dollar denominated Boden 2012s, and it is now understood to be considering a return to the international dollar markets, possibly before the end of this year.
"The market has already changed enough that if Argentina wanted to do a deal in the international markets it could," says Carlos Mauleon, head of Latin American debt capital markets at Barclays Capital in New York.
Barclays Capital, UBS and Merrill Lynch, the banks that took on the unpopular job of advising the government, have each earned about $43m for completing "mission impossible".
Needless to say, investors would have been better off if the default had never occurred or if Argentina had demanded less of a haircut on principal. Yet it still stands that by refusing to tender their $20bn of defaulted debt in the hope of getting a better deal, the holdout creditors have missed out on one of the most profitable trades in the emerging markets this year.
"Given the price performance after the exchange, you can certainly say the proposal was better than many investors thought when they decided not to enter," says a senior credit analyst at one of the biggest Latin American bond houses in New York.
The 76% of bondholders who tendered their defaulted debt have seen all of the new bonds outperform the old.
The peso denominated discount bonds have been the best investment. Their price has soared from Ps82 ($31.6) at issue to Ps118 ($41.5) by mid-August.
Investors that declined the restructuring have seen their defaulted bonds rise about one or two points in the same period, to around 35.00 on a dollar price basis.
Analysts are still recommending that international investors buy Argentina's peso inflation-linked debt — if they can get hold of it. Concerned about rising debt repayment costs if inflation creeps up, the Argentine government has put a hold on any further issuance of inflation-linked debt.
What the holdouts had not expected — and neither had Argentina nor its bank advisers, for that matter — was how strong the bid would be for the new peso bonds. The deal coincided with a surge of foreign investment in Latin American currency debt, and buying the new peso bonds during the tender was a very attractive proposition.
Argentina was pleasantly surprised by achieving a big boost to the percentage of its total debt in pesos.
"There was significant improvement after the restructuring because Argentina used to have 97% of its debt before default in foreign currency and only 3% in pesos," says Jose Barrionuevo, head of emerging markets strategy, the Americas, at Barclays Capital. "Now pesos represent about 37% of total outstanding debt and foreign debt has come down to 63%. This has strengthened Argentina's ability to withstand unfavourable external shocks, although dollar exposure needs to be reduced further."
It helps when debt owed to creditors drops from $102bn to $35bn. But Argentina didn't just get that. It also achieved longer tenors, lower coupons and, for some bonds, interest capitalisation.
The total restructuring package has left Argentina with only about $500m of net external debt amortisations a year, if it convinces the International Monetary Fund to smooth out near-term debt payments. If it does not, then net external debt amortisations could be around $1.5bn a year, but that is a far cry from the more than $25bn of yearly amortisations before the default.
"Argentina has gone from paying interest rates of about 11.6% — the average rate on its US dollar denominated bonds in September 2004 — to just 0.55%," says Christian Stracke, senior Latin American fixed income analyst at CreditSights, a private credit research firm based in New York.
With such incredibly low interest rates on its performing debt stock, Stracke argues that Argentina's GDP growth — which last year was 9% and is estimated to end this year around 7.3% — would have to plunge to 1% a year to push the country's debt dynamics into unsustainable territory.
"Even in the event of extremely low GDP growth, debt to GDP still falls to below 60% by 2017, only trending higher very slowly in the years after that," he adds.
As parsimonious as the restructuring terms were, more people are now recognising that the proposal was based on a reasonable assessment of what Argentina could afford.
"Historically it had the largest NPV [net present value] cut in emerging market restructurings, which justifies the claim from original holders of the bonds that it wasn't a good deal for them, but given objectively what Argentina could offer, it was pretty realistic," says Vladimir Werning, a senior Latin American credit analyst at JP Morgan in New York.
A painful journey
It was not easy getting there. Argentina was combative from the start, proposing a deal at the 2003 IMF meeting in Dubai that, taking into account the refusal to acknowledge past-due interest, would have meant investors forgiving more than 90% of what they were owed.
Argentina refused to negotiate with creditors and had "awful" ideas on how to structure the exchange, said one banker.
Would-be advisers were frightened off by the sheer size of the deal, involving about 500,000 investors holding 152 different defaulted bonds in nine currencies in eight jurisdictions.
Goldman Sachs, Merrill Lynch, UBS and Barclays Capital were originally named as advisers to the government but Goldman dropped out early, believing it had no hope of convincing the Argentines to improve their Dubai offer.
"This was looked upon early as mission impossible," says Mauleon at Barclays. "Everyone on the street was very critical of us for being willing to participate on this trade — there was an enormous amount of reputation risk."
|Techint loan signifies new start for Argentine borrowers|
Argentine steel and energy conglomerate Techint put Argentina's corporate borrowers back on the capital markets map last month (August) when it closed a ground-breaking $1.38bn acquisition loan package.
Techint beat off several rivals in May to buy the 42.5% stake in Hylsamex held by Mexican industrial conglomerate Alfa.
In August, Techint completed its tender for the remaining 57.7% of the stock, held by the public, as part of its $2.25bn acquisition.
The multi-tranche loan is not only the biggest financing for an Argentine company since the sovereign defaulted, but also includes the largest non-structured tranche of naked Argentine risk.
Up until this deal, only Argentine steel maker Siderar's sister company, Siderca, had done a non-structured deal, and it was only $125m in size. The bulk of loans given to Argentine companies in the past year have been export-backed.
The fact that Techint was able to get the deal done at all is testament to how differently banks now view Argentina.
"No one was willing to look at Argentina last year, but now it is different," says Jean Phillipe Adam, head of credit markets for Latin America at Calyon in New York, which came in at the mandated lead arranger level in the Techint deal.
"We are cautiously restarting," he says. "We haven't been among the first [to return to Argentina], but at the same time the whole market has been and remains cautious."
It was a struggle for bookrunners Citigroup, BNP Paribas, HSBC and HVB to stitch together a syndicate of about 15 banks to take on a three part financing that involves credit exposure to Mexican, Venezuelan and Argentine steel company cashflows.
"It was a very complex transaction," says a banker involved in the deal. "There are some banks that are still not permitted to take on steel risk, because they took a lot of hits during the downturn of the steel sector. Then there is a limited number of banks that can do Argentine loans. On top of that the [acquisition funding] structure is an offshore holding company, which again many banks cannot do."
Moreover, Industrial Investments Inc (III), the acquisition holding company owned by Techint in which Venezuelan, Argentine and Mexican steel businesses will be housed, was buying Hylsamex — "not your top Mexican credit" said one banker, and one which has only recently been taken off the distressed list.
The debt part of the financing includes a $500m three year bullet loan to Techint's Industrial Investments Inc (III), priced at 75bp over Libor for months one to nine, 150bp for months 10 to 18, 200bp for months 19 to 24, 300bp for months 24 to 30 and 400bp thereafter.
The acquisition holding company also offered a $500m five year amortising loan with a margin linked to a debt-to-Ebitda grid, currently at 175bp. This drops to 137.5bp for less than 0.75 debt to Ebitda, but is 175bp for 0.75 to 1.0 and 250bp for between 1.0 and 2.0.
Siderar, Techint's Argentine steel maker, also offered a $380m three year facility at 200bp, the biggest non-structured Argentine loan since the default.
Argentina fought creditors all the way, especially the Global Committee of Argentina Bondholders, which it refused to recognise as the voice for mostly international creditors holding $40bn of debt.
Ultimately the key to the deal was to use a model based on Argentina's ability to pay future debt sustainably, rather than on acceptability.
This was a change from previous debt restructurings, when the sovereign and its creditors would together thrash out acceptable terms.
The advisers tackled the problem as if Argentina was a bankrupt company. They analysed its projected revenue streams and cashflow profile over the long term under various payment models and designed the restructuring accordingly.
Argentina's unwieldy debt profile was whittled down to three kinds of bonds, denominated in yen, euros, dollars and pesos.
There were the Pars, which had required no debt forgiveness and whose structure and allocation preferences were aimed at retail investors; Discounts, which had a 75% haircut on principal; and Quasi-Pars, in pesos only and tailored to suit the debt forgiveness local pension funds would accept.
In spite of the Argentine government's public belligerence towards changing the deal's terms, it was eventually tweaked into a shape that was acceptable to most creditors, especially those who had bought the defaulted debt at below 30¢ on the dollar from unsophisticated European investors, specifically to profit from the exchange.
Among the added attractions was Argentina's vow to assume 100% participation in the exchange and that what was left over if participation was not 100% would be used to pay down the new debt.
GDP warrants were attached to all of the bonds and will be detachable in November.
"The GDP warrants are basically the equity kicker in the deal," says Robert Carlson, a senior banker at Barclays. "It was important in defusing GCAB's comment that Argentina was underpaying."
Finally, a law was passed prohibiting the deal from being reopened on better terms.
A good story to tell
Argentina now has a better story to tell than it has ever had. It is a net repayer of debt and is running primary fiscal surpluses for the first time for 50 years. Inflation has dropped to single digits from a peak of 44% in 2002 and Argentina's peso is no longer pegged to the dollar.
The sovereign does not need to return to the international markets, but should it do so it would be to repay debt, not to add to its debt stock, now around 71% of GDP, from 140% just after its devaluation.
Argentina still needs to reach an agreement with the IMF on rolling over about $1.6bn of debt due this year and another $3.1bn in 2006.
If the IMF agrees to better terms, then Argentina should be able to meet its total $13.2bn of amortisations in 2006, $12bn in 2007 and $12.8bn in 2008, without having to go to the international markets.
The holdouts, however, cannot be ignored forever. "I think they need to completely close the chapter on the default by dealing with the holdouts," says Barrionuevo. "This will likely happen next year."
Argentina is prohibited under its agreement in the exchange from reopening the deal on better terms, but considering the level to which the new bonds have rallied, that is less of a sore point for many retail investors who were advised to stay out of the exchange.
Underwriters believe Argentina would attract a strong bid for a dollar denominated global bond offering.
"It is unbelievable the change in attitude and what people are now saying about Argentina," says one head of Latin American debt capital markets. "All of a sudden it has become a buy opportunity."