Argentina’s economic struggles are a danger for provincial restructurings
Eye-watering bond yields on Argentina’s recently restructured sovereign bonds indicate that investors have little faith in its economic plans. That will make it hard for issuers and investors to see eye-to-eye in the wave of provincial debt restructuring talks that has followed the sovereign's deal with bondholders.
Six months after it launched a debt restructuring offer, Argentina’s largest province, Buenos Aires, appears no closer to an agreement with its bondholders. Several other provinces are making very slow progress in talks, and — in the absence of amendments to rescheduled payments — the number of regional governments entering default is increasing. Mendoza remains the only province to have successfully wrapped up a deal.
These yields are problematic for provincial debt talks. Many of the provincial issuers rely on federal transfers for revenues, meaning that even provinces with strong credit metrics traditionally trade at a pick-up to the sovereign. If the sovereign is yielding 17%, the assumed exit yield on the weaker provinces could be well north of 20%.
The whole point of a restructuring is to put an issuer’s debt on a sustainable footing but this is not a sustainable cost of funding for any issuer.