ARGENTINA INITIATES BOND HOLDOUT DEAL

C O N F I D E N T I A L SECTION 01 OF 04 BUENOS AIRES 001161 SIPDIS TREASURY FOR WLINDQUIST, SAO PAULO FOR WBLOCK E.O. 12958: DECL: 10/22/2019 TAGS: ECON EFIN EINV ETRD AR SUBJECT: ARGENTINA INITIATES BOND HOLDOUT DEAL REF: A) BUENOS AIRES 1129 B) BUENOS AIRES 1109 C) BUENOS AIRES 1042 Classified By: Economic Counselor John Fennerty for reasons 1.4 (B) and (D). -------------- Summary -------------- ¶1. (SBU) Minister of Economy Boudou announced that Argentina has signed letters of engagement with three major banks to manage a new offering to holdouts from the 2005 defaulted debt restructuring. Boudou and other GOA officials had been predicting such a move for a number of weeks, and the announcement confirmed what GOA officials have been privately telling USG officials -- that the GOA is focusing all of its energy on concluding a deal with the bond holdouts as the first step on the road to re-accessing the international credit markets and foreign investment. Post will report further developments and details on the bond holdout deal as they unfold. End Summary -------------- GOA Ready to Deal on Holdouts -------------- ¶2. (SBU) Argentine Minister of Economy Amado Boudou announced October 22 that Argentina would begin the process of reaching an agreement with the private bondholder "holdouts" from the 2005 Argentine debt restructuring. In a late afternoon press conference, he said that the GOA had retained Barclays, Citigroup, and Deutsche Bank to outline the terms of a deal and manage its implementation. Contrary to market hopes, however, Boudou offered few specifics on how the debt might eventually be restructured. Instead, he listed concrete steps to be taken in the near term, such as the need to seek approval from the Argentine Congress and from the securities regulators in various countries to undertake the transaction. Boudou asserted that the proposal would likely include holders of approximately USD 10 billion worth of defaulted bonds (about half of the total outstanding) in an exchange of defaulted GOA debt for bonds issued at a substantial discount of original face value. In keeping with the requirements of the 2005 "Ley Cerrojo," the overall terms of the contemplated transaction would be slightly worse for the holdouts than those offered in the 2005 swap, although certain aspects of it might appear more attractive, such as the potential offer of bonds discounted at 65% compared to the 66% discount offered in the 2005 swap. �00A; ¶3. (SBU) According to Boudou, on Monday, October 26, the GOA will submit a bill to Congress seeking amendment to the Ley Cerrojo. The bill is expected to pass easily, because the Kirchner coalition and its allies still control Congress until December. In addition, opposition legislators also understand that a deal to resolve the debt issue must eventually be struck. -------------- Deal Must be Worse for Holdouts -------------- ¶4. (SBU) Stating that the bill he plans to send to Congress will expressly require that the new deal be "more beneficial for Argentina" than the one agreed to in 2005, Boudou declared that the final conditions of the prospective restructuring will reflect this. Among the concerns he noted was the so-called "most favored creditor" provision that gave the creditors who settled in 2005 the right to trade up to BUENOS AIR 00001161 002 OF 004 any better deal struck with the holdouts in the future. Press reports also indicate that Nestor Kirchner, the former President and husband of current President Cristina Fernandez de Kirchner (CFK) who is reputed to be the "strongman" on economic policy, staunchly opposes any agreement that is not significantly more advantageous for the GOA than the 2005 deal. ¶5. (SBU) According to press reports, the GOA will seek a discount to the principal in default of at least "65%." Credit Suisse is quoted as indicating that in a best-case scenario, the discount will exceed the 2005 discount of 66% by only a couple of percentage points. The GOA must strike a balance, however, between the various aspects of the deal -- such as the discount on the bond principal -- and the degree of holdout participation in the swap. Although he did not explicitly state that the new offer would include GDP warrants, Boudou praised them as "a good instrument for both the GOA and the bondholders," suggesting that they might comprise an element of a deal. Boudou also revealed that the GOA will not pay the fees of the banks. -------------- Deal Will Have Cash Component -------------- ¶6. (SBU) The terms of any deal will most likely have a "cash" component, whereby bondholders who tender defaulted debt will be forced to participate in a new offering. In his announcement, Boudou said that the GOA plans to raise about USD 0.10 for each USD 1 worth of defaulted bonds tendered in a swap. He noted, however, that the GOA had not yet determined the terms of a new debt issue, but observed that the GOA "aims to pay a single-digit interest rate." According to Boudou, retail investors would not be required to commit new funds to participate in the swap, suggesting that the GOA is prepared to exempt small holders from the "new cash" aspect of a deal. Boudou made no reference to how the GOA might compensate bondholders for interest accrued since 2005, although he said that the GOA hopes to close the transaction "as soon as possible." -------------- GOA Expects 60% Participation -------------- ¶7. (SBU) The GOA expects that at least 60% of the defaulted bonds would be tendered in a swap, and claimed that the retained banks have already secured about 50% participation. If 60% of the holdouts took a deal, the GOA would have discharged 90% of the original defaulted debt. This level of participation would provide leverage in negotiations to settle lawsuits with residual holdouts and could lead to an upgrade of Argentina's credit rating. -------------- Paperwork Being Filed -------------- ¶8. (SBU) The GOA planned to file paperwork with the SEC in the US, and with securities regulators in Germany and Italy on Friday 23 October. Consideration of the submissions may take up to several months, but press reports quote Boudou as saying that the GOA expects to close the transaction in 45 days in order to be able to take advantage of current advantageous market conditions. Credit Suisse expects the bond swap to settle during the first quarter of 2010. Merrill Lynch believes that the offer will be presented very soon and will remain open for some time to accommodate the differing legal requirements faced by the different participants. BUENOS AIR 00001161 003 OF 004 -------------- Lorenzino Says Deal Likely -------------- ¶9. (C) In an October 21 meeting with EconCouns, Ministry of Economy Finance Secretary Hernan Lorenzino expressed great confidence that a holdout deal was in the offing. He said that the Ministry was totally focused on reaching an agreement with the holdouts, and that a deal can be completed within two to three months if the Kirchners authorize it. Noting that the conditions in the credit market are now ripe, he cautioned that the window of opportunity to reach a deal is narrow because financial market conditions could easily worsen by the first quarter of next year. Such a development would make it impossible to reach a deal. Lorenzino said that Argentina needs access to the international credit markets and to foreign investment to deal with a tightening fiscal situation and invest in much-needed infrastructure improvements. Given this situation, he was sanguine that the Ministry of Economy would ultimately receive the go-ahead from the Kirchners to conclude a deal. -------------- Normalization Not Immediate -------------- ¶10. (C) Lorenzino stressed that a deal with the holdouts would not immediately result in "normalization" with the international credit markets, but would rather be the first step in that direction. It would prepare the way for serious discussions with the IMF regarding an Article IV review (but not about restarting IMF programs in Argentina),which would likely lead to a deal with the Paris Club creditors, and complete the process of normalization. -------------- ICSID Comes Later -------------- ¶11. (C) On the issue of the outstanding expropriation/ICSID cases, EconCouns noted that some of the cases are ripe for settlement, and that settling them would send a positive signal to potential U.S. investors (and others). Lorenzino agreed, saying he would turn to this issue after the holdout issue is resolved. He stressed that the original U.S. claimants must not sell their claims to vulture-fund type entities as has happened with some of the bond holdouts. In addition, the claimants he would be willing to address must be prepared to reinvest some of the settlement proceeds in Argentina. -------------- Comment -------------- ¶12. (C) The announcement by Boudou appears to be the first credible sign that the GOA is prepared to seriously deal with the holdout issue. It is unlikely that he would have made such an announcement without the Kirchners' approval. This could mean that the reality of the country's difficult fiscal situation has finally begun to sink in, compelling the government to begin the process of normalizing its relations with the international credit markets and financial institutions. However, many things can still derail a deal. Most importantly, there is no guarantee that market conditions several months from now will continue to be as favorable. Since interest rates are set when deals are nearing completion rather than when negotiations are initiated, today's favorable conditions could easily change, and not for the better. Recently, there has been a significant run-up in Argentinean securities, and even some BUENOS AIR 00001161 004 OF 004 of the defaulted-on bonds have as much as doubled in value. This situation may continue into next year, but the old Wall Street adage has it that traders "buy on the rumor and sell on the news." As speculation over a potential deal increased over the past few months, there were many who clearly bought on the rumor. The question now is how many will sell on the news -- which was announced by Boudou, and how will that affect market conditions when a deal could be made ready to go. Beyond that, the uncertainty that continues to loom large is whether the Kirchners, who have given the green light to begin negotiations, will ultimately approve a deal, especially one reached under more adverse market conditions. MARTINEZ