Province of Buenos Aires Debt Exchange

UNCLAS BUENOS AIRES 003179 SIPDIS SENSITIVE SIPDIS PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS AND OCC FOR CARLOS HERNANDEZ NSC FOR SUE CRONIN USDOC FOR ALEXANDER PEACHER USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA E.O. 12958: N/A TAGS: EFIN ECON ELAB ALOW AR SUBJECT: Province of Buenos Aires Debt Exchange Achieves 93 percent Participation. ¶1. Sensitive but unclassified. Not for internet distribution. -------------- Summary -------------- ¶2. (SBU) The Province of Buenos Aires debt exchange closed on December 16. Preliminary results indicate that the province received tenders for USD 2.8 billion of old bonds, achieving a 93 percent participation rate, much higher than expected. Holdouts, likely European retail investors, represent the remaining 7 percent (USD 213 million). Financial analysts put the offer's net present value at 45-55 cents on the dollar, well above the 35 cents offered in the GOA debt restructuring in March, so it is not a surprise that the province achieved a higher participation rate. But the GOA's decision to prepay the IMF also helped increase participation. Without IMF support, prospects for holdouts from either the GOA or BA debt exchanges look bleak. President Kirchner has said that holdouts from the GOA exchange won't be compensated during his administration. Taking a similar hard line, Governor Sola said that investors who did not participate in the provincial exchange had lost their opportunity to be paid. End Summary. -------------- Launching of the Exchange -------------- ¶3. (U) On November 7, the Province of Buenos Aires launched its exchange offer of new debt for its debt that has been in default since January 29, 2002. The exchange remained open for six weeks with an early submission period ending on December 2 that was intended as an incentive for retail investors to participate. Investors' principal claims were USD 2.6 billion and past-due-interest totaled USD 1.6 billion. However, the province only recognized interest at the original contractual rate until December 31, 2001 and a 2 percent annual rate from January 2002 to December 2005, resulting in past-due- interest recognized of only USD 382 million. Consequently, total claims (principal plus past-due- interest) recognized by the province totaled USD 3 billion. ¶4. (U) After the launching of the exchange, officials from the provincial Ministry of Economy along with representatives from Citigroup - the financial advisor for the exchange - went on a road-show visiting the cities of Milan, Zurich, Geneva, London, Boston and New York to promote the transaction. -------------- The Defaulted Bonds and the New Bonds -------------- ¶5. (U) The eligible defaulted bonds included sixteen instruments denominated in four different currencies - out of which eight were EUR-denominated, six USD- denominated, one JPY-denominated and one SFR- denominated. The eligible bonds were issued under New York, German and Swiss law. ¶6. (U) In exchange for the eligible bonds, the province will issue on January 12, 2006 (the settlement date of the transaction) USD 2.3 billion in three types of bonds (denominated in EUR and USD -- interest rates indicated below are for USD bonds): - A long-term Par bond maturing in 2035, with a step- up coupon of 2 percent until 2007, 3 percent until 2009 and 4 percent until 2035 with no principal reduction. - A medium-term Par bond maturing in 2020, with a step- up coupon of 1 percent until 2009, 2 percent until 2013, 3 percent until 2017 and 4 percent until 2020, with no principal reduction. - A Discount bond maturing in 2017, with a 9.25 percent coupon and a 60 percent principal reduction. ¶7. (U) The medium-term Par bond and the Discount bond were limited to issuances of USD 500 million and USD 750 million, respectively, while the long-term Par bond issue amount had no restrictions. Retail investors (holders of bonds worth less than EUR 40,000) presenting their bids in the early- subscription period (ending December 2) had priority for allocation of the medium-term Par bond and the Discount bond. ¶8. (U) Financial analysts valued the offer's net present value at 45-55 cents on the dollar - well above the 35 cents offered by the GOA debt restructuring closed on June 2005. According to analysts, this higher financial value guaranteed a higher participation rate than in the GOA's exchange, which reached 76 percent. -------------- Exchange Results -------------- ¶9. (U) Governor Felipe Sola announced the preliminary results of the transaction after the exchange closed on December 16. The GOA received tenders for USD 2.8 billion worth of old bonds, achieving a 93 percent participation rate, higher than expected. Holdouts, likely European retail investors, represent the remaining 7 percent (USD 213 million). The final results are expected to be released to the press by December 23. The delay to present the formal and detailed results (including issue amount of each bond, participation by geographical area, etc.) are due to the large number of orders received, estimated to be more than 34,000. The medium-term Par bond and the Discount bond that had limits on issuance were both oversubscribed, according to information from the provincial Ministry of Economy. ¶10. (U) Governor Sola said that the exchange generated a debt reduction of USD 2 billion, which represents 32 percent of the province's total expenditures for 2005 and four times its health expenditures. He attributed the success of the transaction to the provincial Ministry of Economy's cooperative approach and persuasion, and to the GOA's firmness during its own debt exchange. Governor Sola also attributed the higher than expected participation in the exchange in part to President Kirchner's announcement on December 15 (the day before the provincial restructuring closed) that the GOA will repay its entire USD 9.8 billion IMF debt. ¶11. (SBU) Comment: BA Province offered substantially better restructuring terms than the GOA did, so it is not a surprise that the province achieved a higher participation rate. But the GOA's decision to prepay the IMF also helped increase participation, because it signaled that holdout investors would no longer have IMF support for another exchange offer and substantially reduced the likelihood that they will be repaid anytime soon. Prospects for holdouts from either debt exchange look bleak. The GOA has not made any effort to deal with holdout creditors since it closed its debt exchange in June, and President Kirchner has said they won't be dealt with during his administration. Taking a similar hard line, Governor Sola said that investors who did not participate in the provincial exchange have lost their opportunity to be paid. End Comment. ¶12. (U) To see more Buenos Aires reporting, visit our classified website at http://www.state.sgov/p/wha/buenosaires GUTIERREZ