The emerging markets bond markets shrugged off the disappointment of Argentina’s restructuring offer on nearly $100 billion in defaulted debt yesterday as the asset class closed up at the end of trading.
The JP Morgan Emerging Markets Bond Index Plus (EMBI+) tightened by 9bp to 404bp over US Treasuries as investors took Argentine Economy Minister Roberto Lavagna’s statement in their stride.
At a press conference in Buenos Aires, Lavagna told reporters that Argentina planned to offer bondholders new securities with a nominal value of up to $41.8 billion if more than 70% of investors took part in the swap or $38.5 billion if there was less than 70%. The offer, which will be launched on November 29, will consist of three main types of bonds – par, quasi-par and discount. The offer will remain open until January 17 next year.
The nominal issue date of the three new bonds was moved back six months to December 31, 2003, which means that $1 billion in interest payments will be immediately owed to bondholders upon completion of the swap.
Bondholders will also gain if Argentina’s economy surpasses 3% growth. In that case the government has pledged to pay an amount equal to 5% of the additional growth in interest bonuses to bondholders and another 5% to buy back debt.
Lavagna also announced a “favoured creditor clause” which will allow creditors participating in the exchange to also take part in any subsequent offers made to investors that hold out and win better terms through court cases brought against the government.
The minister claimed that the offer was the best that the government could make. “The principal demonstration of good faith is when you make a promise you know you can fulfil.”
Some creditors, however, were left fuming arguing that the announcement was not a significant improvement on the previous offers that the government had made in draft proposals. “Bondholders are very frustrated and, after this improvement, I think they will be even more frustrated,” said Hans Humes, co-chairman of the Global Committee of Argentine Bondholders, an umbrella group representing foreign investors that hold about $37 billion in defaulted debt. “There has not been any substantial improvement in the offer.”
Ingrid Iversen, head of emerging markets debt at Insight Investment, the fund management arm of the Halifax and Bank of Scotland group, says the proposal still left many questions unanswered. “There’s still too many bits missing; we don’t have the full information yet,” says Iversen, who is just an observer as she holds no Argentine debt.
She says, in particular, that there needs to be more detail about the “favoured creditor clause.” “What will be the treatment [of the original participants] if someone negotiates a better deal through a lawsuit? What happens to someone who takes part now?” she says.
Iversen also questions the Argentine government’s preferential treatment of retail investors. “What is retail?” she asks. “Are we talking European retail, Argentine retail?”
Despite these concerns she reckons the swap will have a good participation rate even though the government has not stated a minimum acceptance level. “Given that there’s no minimum acceptance level that the government is looking for, will they get enough to make it credible? I think they will,” she says.
One reason is that many investors simply want to move on and don’t have the stamina or the resources to pursue lawsuits. Another reason is that Argentine debt is among the best performers this year. “Argentine debt prices are up 14% this year, therefore it represents a good exit,” says Iversen.
The offer is now with the US Securities and Exchange Commission. Once the SEC gives the green light, Lavagna and his team will work to convince bondholders to participate in the swap.