Argentina Offers 66.3% Haircut on Defaulted Bonds (Update3)

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Argentina Offers 66.3% Haircut on Defaulted Bonds (Update3)  (What about the USA?)


By Drew Benson and Eliana Raszewski

April 15 (Bloomberg) -- Argentina offered new bonds to holders of $20 billion of debt left out of an earlier settlement, seeking to end a nine-year default and regain access to international capital markets.

The government proposed similar terms to its 2005 restructuring, granting securities due in 2033 at a 66.3 percent discount, Economy Minister Amado Boudou said at a news conference in Buenos Aires. The proposal excludes past payments on warrants linked to economic growth and pays past due interest with 8.75 percent bonds due 2017. Argentina also may sell as much as $1 billion of new bonds due 2017, he said.

"It's an important first step for Argentina to become a normal country," said former central bank President Martin Redrado. "Argentina needs to get back to the international, voluntary capital markets."

Argentina's offer would compensate holders from Greenwich, Connecticut-based Gramercy to Stone Harbor Investment Partners of New York, as well as tens of thousands of individuals, many in Italy. For the government, resolving the issue sets the stage for its first international bond sale since the 2001 default on $95 billion of debt. The country needs to borrow $12.5 billion this year, about $6 billion of which has not been lined up yet, according to estimates from Credit Suisse Group AG.

'Lower End'

The total value, through December, for investors who participated in the 2005 offer was 57 cents, according to Exotix Ltd., a brokerage that specializes in distressed securities. Igor Arsenin, a strategist with Credit Suisse AG in New York, said the government's proposal today has a value "above" 50 cents on the dollar.

"The announcement came at the lower end of expectations," Arsenin said. Jim Craige, who helps manage about $12 billion at Stone Harbor, said without the payments for the warrants the deal is worth about 50 cents on the dollar.

"I don't think they're going to get as high a participation rate, and the ones that do go along with this, just because they don't want to pursue it, or don't want to drag this out any further, will just sell the bonds, and that'll cause a lot of pressure on the market," said Craige. He said he hasn't decided whether to accept the terms.

60% Participation

Boudou appealed to holders not to make a "mistake" and reject the offer. He said the government is "tough but serious" with debt holders. The government expects at least 60 percent of holdouts to accept the offer, Boudou said.

"If Argentina can fix the problem with the international community, investors won't treat Argentina as they do now," said Alberto Bernal, head of fixed-income research at Bulltick Capital Markets in Miami. "Argentina will be able to manage its fiscal policy according to the needs of the economy and refinance its upcoming debt, which means interest rates will come down." Bernal said he expects a 75 percent participation rate even though "the offer is worse than the one in 2005."

Argentina's borrowing costs fell to the lowest level since 2008 ahead of Boudou's announcement, with the extra yield investors demand to own Argentine bonds instead of U.S. Treasuries narrowing 17 basis points, or 0.17 percentage point, to 6.01 percent, according to JPMorgan Chase & Co. That's the smallest yield gap since June 2008. Boudou said lower interest rates and a long-term sustainable debt level are the goals of the proposal and the deal creates a "new opportunity" for investors.

Bank Fees

Creditors will pay banks' fees on the swap, Boudou said. The government will pay no more than $160 million in interest, while par bonds issued in the swap will be capped at $2 billion, he said. Boudou said individual investors holding less than $50,000 of debt will receive a cash payment.

The government plans to start the debt swap offer in 10 days and will keep it open for 30 days. By excluding payments on the gross domestic product-linked warrants, the government will save about $1.36 billion, Boudou said.

For investment funds that bought defaulted debt at prices as low as 15 cents on the dollar after the 2005 exchange, "it's a no-brainer," Redrado said in an interview before the announcement. The government had vowed after that restructuring not to negotiate a new deal with holdout creditors.

Argentina was mired in a three-year economic slump in late 2001 that made it harder for the country to make payments on billions in dollar-denominated debts it racked up in the 1990s, when the peso was fixed one-to-one against the U.S. dollar.

Frozen Accounts

As the government moved to slash salaries and freeze bank accounts, a country known across Latin America for its broad tree-lined avenues, steakhouses and malbec wines found itself the center of violent protests. Residents across Argentina took to the streets to oppose the measures, with more than two dozen people were killed in protests. The country had five presidents in a span of two weeks, ending with Eduardo Duhalde in January 2002 after the country stopped paying its obligations and let its currency tumble.

The country is restructuring debt as the economy emerges from an economic slowdown. South America's second-largest economy grew an average of more than 8.5 percent a year from 2003 to 2008, before slowing to 0.9 percent last year, according to the national statistics institute.

The government budget forecasts economic growth of 2.5 percent this year, while Boudou said earlier this month that 2010 growth will exceed 5 percent.

Budget Deficit

Argentina's budget deficit may double to 1.4 percent of GDP as President Cristina Fernandez de Kirchner seeks to bolster her popularity ahead of elections in 2011, RBS Securities Inc. economist Boris Segura wrote in a report last month.

Lawsuits from creditors who rejected the 2005 offer have deterred Argentina from selling bonds overseas since the nation defaulted on a record $95 billion of debt in 2001.

U.S. District Judge Thomas Griesa in Manhattan granted a request last week by Kenneth Dart's EM Ltd and Elliott Management Corp.'s NML Capital, funds that own defaulted Argentine debt and are seeking full repayment, to "attach" assets deposited by the central bank of Argentina in the New York Federal Reserve.

Griesa said in court that he wants to review the terms of the government's bond exchange offer before it goes forward.

Lawsuits

Lawsuits will remain a threat should Argentina seek to tap markets following the exchange as long as any creditors who are filing lawsuits remain, said Arturo Porzecanski, an international finance professor at American University.

"The day there is some new money flowing in from the rest of the world to Buenos Aires, I think they are going to grab it" to cash in on legal rulings in their favor, he said in a telephone interview from Washington.

Fernandez moved this year to tap $6.6 billion in central bank reserves to pay debt due this year, saying that her government won't sell bonds "at just any interest rate" and ruling out a cut in spending and in subsidies. Argentina made its first payment to private creditors with reserves on April 5.

Exotix quoted Argentina's defaulted untendered dollar bonds at a midpoint of 49.5 cents on the dollar today, about the highest since the 2001 default. The debt traded as low as 11 cents after the collapse of Lehman Brothers Holdings Inc. in September 2008, according to Amir Zada, a New York-based director at the firm.

The restructuring will allow Argentina's 23 provinces to sell bonds as they struggle to cover rising financing needs, according to Standard & Poor's.

Provincial financing needs will jump to 26 billion pesos ($6.7 billion) in 2010 from 18.5 billion pesos last year, Veronica Sosa, an analyst at Buenos Aires research company Economia y Regiones, said earlier this month. The local governments' deficit will swell to 13 billion pesos this year, equal to 0.8 percent of GDP, from 9 billion pesos in 2009, she said.

To contact the reporters on this story: Drew Benson in Buenos Aires at eraszewski@bloomberg.net;
Last Updated: April 15, 2010 19:23 EDT

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