Exit strategy

Following Argentina’s bond swap agreement with its creditors in August, the country now faces the challenge of reviving its economy. Lawyers in the US and Argentina talk to us about whether the debt restructuring is the first step towards the country’s exit from its economic crisis, and what happens next

By Adam Critchley

Right on deadline, Argentina reached an agreement with its creditors in late August for the restructuring of its debt via a bond swap, following the country’s ninth default on its $65 billion debt obligations in May. 

The agreement served to allay fears of a messy and protracted default, and which is seen as possibly setting a precedent for future sovereign debt crises.

As a result of the agreement, Argentina will issue a total of $63.2 billion in new dollar-denominated bonds as part of the exchange, and 4.18 billion euros ($5.01 billion) of debt denominated in the single currency, while continuing to work with the retail bondholders in Europe who hold the one per cent of debt that wasn’t included in the agreement, according to Economy Minister Martín Guzmán.

The deal is a major victory for Latin America’s third-largest economy as it struggles with a severe recession that has been exacerbated by the COVID-19 pandemic and the subsequent economic lockdown imposed to staunch its spread. The deal also contrasts sharply with the country’s 2005 debt restructuring, which saw around a quarter of bondholders accept the government’s offer, and which led to more than a decade of legal battles, dark times that many observers feared would be repeated as this year’s negotiations dragged on under the black cloud of the pandemic.

‘AN EXERCISE IN COMPROMISE’

“The length of the process did not surprise me due to the complexity of the situation,” Thomas Laryea (pictured), of counsel at law firm Orrick, who represented the steering members of the Argentina Creditor Committee (ACC) in the successful negotiations with the Argentinian government, tells The Latin American Lawyer.

“The process essentially lasted from January through August, but I would say that while there were some discussions in the first half of this period, engagement by the government in a manner approaching ‘negotiations’ did not commence until after the default in May,” he says.

But despite the shorter than expected negotiation period, the talks were complex, he adds.

“One of the challenges in the process was the basis for assessing debt sustainability in the absence of a clearly formulated forwardlooking economic reform program. Bondholder organisation admittedly was also a challenge that affected the dynamic and the timeframe of the process. The presence of three creditor committees and some bondholders engaging actively alongside those committees was a complicating factor.”

The process was also no doubt impeded by the COVID-19 pandemic, which has severely affected Argentina, much of which remained in lockdown until early September, and with the number of confirmed cases close to 500,000 at the time of writing, the country now ranks among the top 10 for the number of infections. Some observers anticipated that the adverse economic and humanitarian conditions may have influenced the bondholders’ negotiations, making them less inclined to push harder for a better deal.

“The Covid-19 pandemic was certainly a factor,” Laryea says. “But, I think that there has been a misplaced tendency to view COVID-19 as if it were a factor that only affects sovereign debtors in this context. The fact that the pandemic is global also has implications for the investors who are incurring losses on the Argentina bonds at the same time as they are absorbing other economic challenges at home and in other markets. Also, bondholders recognise the case for cashflow relief during the height of the crisis, but they also recognise that the current challenges caused by COVID-19 that all countries are facing to some degree should not be an excuse for countries not to engage in economic reforms that would bolster their payment capacity over the longer term,” he says.

And with respect to a drawn-out process or a failure to reach agreement leading to litigation, as occurred in 2005, Laryea believes the litigation risk is generally over emphasized in sovereign debt restructurings. “The overwhelming majority of investors are geared towards a negotiated resolution and only consider litigation as a last resort,” he says.

But such multi-player wrangling in a complex negotiation process is not uncommon, and something that Laryea is accustomed to.

“In my experience, there is rarely, if ever, a unanimous position among creditors in sovereign debt restructuring. This is essentially an exercise in compromise. We don’t have a sovereign bankruptcy law or a bankruptcy judge to determine the merits of the different views among the parties. I believe that the ACC played a highly constructive role among the bondholders and in the collective engagement with Argentina. Because the ACC had members that held both the Exchange Bonds (dating from 2005) and the Global Bonds (dating from 2016), the ACC was hardwired to work towards common ground. I would also say that the ACC members and advisers had deep experience of the institutional dynamics within Argentina and with respect to the international players, including the IMF, and that this experience benefited the process.”

The so-called exercise in compromise seems to imply that investors will lose money on the deal, with Argentina paying back at a lower per-dollar rate, but such a face-value evaluation is too simplistic, Laryea says.

“Bondholders, as a whole, certainly gave up significant value relative to their legal claims,” he says. “However, the valuation of how much bondholders gave up is complicated. In part, the valuation depends on the price at which the respective bondholder bought their bonds. Also, in a forward-looking sense, bondholder recovery would depend on the exit yield that the markets will attach to the new bonds and that depends on the judgment of Argentina’s ongoing credit worthiness.”

The difficulty of the legal negotiations was also due to the Argentinian government’s intention to implement a ‘Pac-Man strategy,’ Fernando Hernández (pictured), a partner at Buenos Aires-based law firm Marval O’Farrel Mairal, says.

“That strategy consisted of allowing the reassigning of a series of bonds that could be used for collective action clauses, leaving the rest outside of the swap,” he says. “The strategy would allow it to achieve partial swap closures that by offering futures that were better than the restructured bonds, and the eligible nonrestructured bonds, would allow it to add more bonds to the restructuring with each partial closure,” Hernández says. “The negotiation was difficult but, fortunately, as the results show, the two sides’ positions were not so far apart,” he says.

“Given the situation created by the pandemic and the subsequent lockdown, and the uncertainty regarding the future, the country’s creditors have demonstrated a more conciliatory approach, expressing a preference to show patience and allow for private restructuring rather than pushing for possible legal action,” he adds.

“The restructuring of the debt with the private international bondholders is a fundamental step in the reorganisation of the Argentinian economy. With the success of the swap offer, the government achieved a quick exit from the default situation with its private creditors, and the new due date of 2025 implies a substantial breather regarding its foreign debt obligations.”

OUT OF THE ‘LABYRINTH’

Centre-left President Alberto Fernández, who took power in December, said after the agreement had been reached that Argentina had been in a “labyrinth” of debt that has now been solved, but that challenges remain, the first of which is to reactivate the domestic market, as consumption has slumped along with demand for the country’s exports, and international commodities prices. For his part, Guzmán said that Argentina also needs to turn its attention to striking a new deal with the International Monetary Fund to replace a defunct $57 billion loan facility agreed with the country in 2018, but which will not likely be agreed upon before the spring, and that the country also needs to resolve the debts burdening its provinces.

The country is not out of the woods yet, therefore.

“The restructuring of the bonds is only part of the solution,” Laryea says. “We know that Argentina needs to refinance its exposure to the IMF, which remains its largest creditor. And we know that Argentina needs to implement a program of economic reforms that would contribute to debt sustainability and to the welfare of the Argentine economy and people. These reforms need to be sustained over the longer term. Accordingly, it would be a mistake to look to the bond restructuring as a quick fix.”

President Fernández has pledged to seek a deal with the IMF that imposes no conditions on the country’s economic policy, such as the implementation of new austerity measures, no doubt wary of the population’s opposition to yet another bailout. Argentina and the IMF have a long and chequered history. The country has negotiated no fewer than 21 arrangement with the IMF since joining it in 1956, which include the $57 billion loan negotiated in 2018, the largest in the IMF’s largest, while the Fund called a halt to providing aid to the country in 2001 amid the then government’s inability to meet the conditions for loans.

“Conditions to IMF financing is a legal and policy requirement of the IMF,” Laryea says. “Accordingly, I do not take literally the suggestion that Argentina expects to negotiate a new IMF program without conditions. The foremost question is what is the content of the economic reform program that the Argentinian government proposes in order to appropriately enhance the sustainable output of the economy. After that, the secondary issue is which aspects of the economic reform program would the IMF consider to be critical in order to establish them as conditions for IMF financing. I consider that the ball is very much in the court of the Argentinian government at this stage.”

Any new IMF plan will have to be sent to the country’s Congress for approval before the deal is signed, and which could take the form of a stand-by arrangement, as per the 2018 deal, or an extended fund facility, minister Guzmán has said, after admitting that the 2018 IMF deal “deepened the recession.”

And according to Marval O’Farrell Mairal’s Hernández, before requesting support from the IMF, Argentina’s government has to renegotiate the debt it took on in 2018.

“In that renegotiation, the IMF will surely impose conditions, and which could be related to the reduction of the country’s fiscal deficit, and reduction and control of monetary issuance, avoiding further currency depreciation and controlling inflation, among other conditions. The Argentinian government has not yet presented its economic plan, but some of those conditions, such as the reduction of the fiscal deficit and the control of monetary emissions, would require a reassignment of the budget, and the imposition of austerity measures,” Hernández says.

Such measures are necessary “so that the agreement with bondholders isn’t just a breather,” he adds.

“Those structural changes need to be oriented towards reducing and controlling inflation, strengthening the currency and stabilising the exchange rate, reducing the fiscal deficit and guaranteeing judicial stability to attract investments and access international capital markets at reasonable rates,” he says. “That is a task that is not only complex in itself, but which is made even more complex by the economic consequences of the COVID-19 pandemic.”

“It’s difficult to forecast the future, and Argentina’s macroeconomic situation is very complex, but the recent and successful restructuring of the country’s sovereign debt is a good kickstart to the reconstruction of the Argentinian economy,” Hernández says. “Depending on the agreement with the IMF, the length of the lockdown and the effects of the COVID-19 pandemic and, crucially, the path the government takes with the policies and measures that it adopts, and the effect they have, in the medium term there could be an improvement in the conditions for Argentinian companies’ access to financing and capital markets.”