Argentina 1, Bondholders 0: victory for $82bn defaulter

Argentina brought down the curtain on the biggest debt default in history this week, with a triumphant final act in which investors surrendered to its restructuring plan and accepted losses of up to 70%.

  • 04 Mar 2005
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The state that reneged on just under $82bn of debt in 2001 announced yesterday (Thursday) that more than 76% of bondholders had accepted its restructuring proposals.

"The markets have spoken. They have spoken with clarity, accepting very clearly the Argentine government's proposal," said economy minister Roberto Lavagna, whose refusal to back down in an epic two year battle with bondholders has won Argentina the result of its dreams.

Many investors had sworn to force Argentina to reach a negotiated settlement and pay back a much higher percentage of the debt.

The battle began with Argentina offering to repay 10% of the defaulted bonds' net present value and investors insisting on only a 30% haircut off the principal they were owed.

Creditors' groups tried every remedy including legal action. But over the last two weeks, most of Argentina's 500,000 institutional and private bondholders gave up the struggle and accepted by far the lowest recovery rate of any sovereign debt restructuring.

Investors tendered $62.2bn of Argentina's $81.8bn of defaulted debt. On April 1 the government will issue $35.2bn of new bonds in return, leaving about $23bn of unpaid interest and $25bn of defaulted bonds in no man's land.

For the people of Argentina, the difference between a good deal and a bad deal on the restructuring will be felt for decades to come.

Argentina's total debt after the restructuring will be around $125bn or 72% of GDP, down from $190bn at the end of 2004.

The dollar/peso mix of the country's debt has also moved in Argentina's favour.

The restructuring comes at a time when international investors are desperate to invest in Latin American currencies, as yields keep tightening on emerging market dollar bonds. Bondholders tendered for so many peso-denominated bonds in the exchange that Argentina's peso debt will now account for about 37% of its total outstanding public obligations, up from just 3% in 2001.

Argentina's success has made a mockery of the International Monetary Fund and the G7 group of industrialised nations' supposed ability to force countries to stand true to their debts.

The Global Committee of Argentine Bondholders (GCAB), a group that represents most of the investors who are still holding out, has made ill-fated attempts over the past two years to get the IMF to use its might to compel Argentina to enter into "good faith" negotiations with bondholders.

Market lock-out unlikely

One argument bondholders used, which now seems increasingly unlikely to hold water, is that for not negotiating in the conventional way with its creditors, Argentina would be banished from the international capital markets for ever.

Considering the government's huge primary surplus, Lavagna has neither need nor inclination to borrow internationally any time soon.

Besides, international investors are seeking out Argentina, rather than the other way round, in search of peso denominated bonds, at a time when the Argentine currency is strengthening against the US dollar.

Some of the world's most favoured borrowers are considering whether they could issue bonds in Argentine pesos.

"We are looking forward to the Argentine situation resolving," said Eloy Garcia, treasurer of the Inter-American Development Bank, which has a policy of borrowing in Latin American currencies, so long as they can be swapped back to dollars at competitive prices.

The Washington-based bank has done a Mexican peso global, a Colombian peso issue and a Eurobond in Brazilian reais. According to Garcia, "once the Argentine situation becomes accepted, that's another market that we will look at... I understand the market is very active and there is a lot of demand for Argentine pesos."

Bondholders and Wall Street analysts have voiced the concern that a victory by Argentina would set a dangerous precedent, encouraging other countries to refuse negotiations with bondholders.

But that view may be alarmist. Every country and restructuring is different, and neither Argentina's result nor the run-up to it has derailed plans by the Dominican Republic to seek a market-friendly restructuring of its dollar debt before it reaches default.

Argentina's success was by no means a given, nor did it come quickly or easily. Other countries, such as Uruguay, have reaped enormous benefits by successfully negotiating with investors to reach a debt restructuring agreement.

Ecuador, which completed a negotiated debt restructuring several years ago, is now preparing to come to the international capital markets with about $750m of bonds.

The final tally of acceptances of the Argentine offer will not be known until March 18. On April 1 Argentina will issue $15bn of par bonds, $12bn of discount bonds and $8bn of quasi-par bonds.

New dollar bonds will be put into indexes like the EMBI+, a move which will further boost the attractiveness and liquidity of the new paper.

Argentina's credit rating may also rise. S&P said early last month that it might raise Argentina's foreign currency credit rating from SD (selective default) to B-, which would put it on the same footing as Ecuador.

Moody's rates it Caa1 and Fitch DDD. 

  • 04 Mar 2005

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 414,341.60 1584 9.03%
2 JPMorgan 377,311.36 1724 8.23%
3 Bank of America Merrill Lynch 358,416.32 1295 7.81%
4 Goldman Sachs 266,063.47 914 5.80%
5 Barclays 264,598.20 1056 5.77%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 44,979.63 190 6.68%
2 Deutsche Bank 37,125.85 136 5.51%
3 BNP Paribas 36,403.69 206 5.41%
4 JPMorgan 33,752.71 110 5.01%
5 Bank of America Merrill Lynch 32,865.23 106 4.88%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 22,398.41 104 8.72%
2 Morgan Stanley 18,608.72 99 7.25%
3 Citi 17,768.49 110 6.92%
4 UBS 17,372.80 70 6.76%
5 Goldman Sachs 17,228.66 97 6.71%