Creditors in Argentinean provinces fight to avoid painful restructuring

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Holders of Argentina’s $ 15 billion provincial debt are increasingly concerned that pressure from the national government is driving “arbitrary” demands for debt restructuring, threatening investors with significant losses.

After the success restructuring out of $ 65 billion in sovereign debt with foreign creditors in August, Argentina’s left-wing government is now locked in talks with the IMF to renegotiate the repayment of $ 44 billion loaned since a currency crisis in 2018.

The foreign creditors of the Argentine provinces are as follows. They say the national government is heavily arming provincial authorities to demand punitive debt restructuring affecting most of the market, forcing them losses or “haircuts.”

“The idea that every province, whatever its circumstances, should be lacking and follow the same approach as the sovereign is deeply cynical. As creditors, we are not going to accept such a framework, and the provinces recognize it, ”said Daniel Freifeld, founder of Callaway Capital Management, which holds Argentinian provincial bonds.

Mr Freifeld added that “many provinces are trapped” between creditors and the national government, pointing out that in the meantime the provinces are delaying potential investments and racking up unpaid interest bills.

Callaway and other creditors established Argentina’s first provincial bondholders committee, reflecting efforts at the national level. The committee, which includes bondholders holding a total of about $ 3 billion in provincial debt, argues negotiations should be based on what the provinces are able to pay – not what the national government would like them to pay.

Investors believe the government’s intransigence stems from a desire to protect the country’s declining foreign exchange reserves, seen as a bulwark against a weak currency. The official peso rate has already lost a quarter of its dollar value this year, after the coronavirus crisis exacerbated a three-year recession.

“It would be foolish but foolish of them to insist on arbitrary and artificial haircuts when they have much bigger fish to fry,” said a senior executive of a hedge fund holding provincial debt, insisting that Argentina would struggle to attract capital to support its recovery if some provinces continue to demand what creditors see as unreasonable repayment terms.

A dispute “can not be excluded”, warned the investor. “Our preference is to avoid it, because it is harmful to everyone and is a waste, but creditors do not have indefinite patience.”

“There is no real argument for the provinces to seek the same type of debt relief as the sovereign,” admitted Walter Stoeppelwerth, director of investments at Portfolio Personal Inversiones, an investment firm in Buenos Aires. .

While pre-restructuring debt service costs for the national government represented more than 20 percent of economic output, for most provinces the ratio is single digits, Stoeppelwerth added. The leverage effect is also lower at the provincial level.

Some provinces ruled by politicians independent of the national government made deals with their creditors, including Mendoza and Neuquén, but others preferred to play hardball.

The biggest battle is with the bigger, the impoverished province of Buenos Aires which surrounds the capital. With bonds in default since May worth more than $ 7 billion, it not only accounts for about half of the provincial debt burden, but its governor, former Minister of National Economy Axel Kicillof, is a powerful figure in the ruling coalition. The province has proposed a debt restructuring that would leave investors with an estimated collection value of 46 cents on the dollar, while bondholders claim 85 cents.

The deadlock has plunged the province’s 2024 bond deeper into a troubled territory. It hovers below 40 cents on the dollar, after trading at 50 cents in August.

Marcelo Etchebarne, country manager in Argentina at law firm DLA Piper, which represents several provinces in debt negotiations, argues that given the “catastrophic” economic situation in Argentina – which he says is as bad as the The country’s financial crash in 2001 – many investors are currently being offered “a very good deal in light of the circumstances”.

He warned that in the worst-case scenario, the provinces could declare bankruptcy, as Detroit did in 2013. “Ask Detroit creditors how it went for them,” he said, noting that unsecured creditors received less than 20 cents on the dollar.

“At the end of the day, it is the ability to pay, but not just to pay the debt,” added Etchebarne. “Before paying the debt, the provinces must pay the judges, the teachers, the police.”

Despite the growing tension, some analysts believe many provinces will eventually reach a negotiated deal with their creditors by the end of the first quarter of next year. Such prospects could be improved if Argentina strikes a relatively quick deal with the IMF – especially if it leads to a rally in Argentine sovereign bonds.

A sovereign bond that will mature in 2030 has fallen below 40 cents on the dollar, despite debt restructuring. It traded up to 52 cents in September.

The calculation of the provincial debt is considered essential for the country to progress. “Argentina will not emerge from its current economic quagmire until this problem with the provinces is resolved,” Freifeld said.

Additional reporting by Colby Smith

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