Monday, October 5, 2015

Biggest debt payment in a decade

Economy Minister Axel Kicillof announces new bond issue to the press on Friday.

By Ignacio Portes
Herald Staff

Concerns for Central Bank reserves as gov’t shells out US$5.9B for Boden 2015

The biggest debt payment in a decade is set to take place today, with Argentina scheduled to disburse US$5.9 billion from its Central Bank reserves to cancel the Boden 2015 bond series, which matured on Saturday.

It will be the closing act of an outgoing government that has made debt reduction one of its central rallying cries — but the payment also comes amid concerns about the need to take on new debt in the near future to rebuild currency reserves, which could drop below the US$30-billion mark today.

Holders will receive US$103.50 per bond today, consisting of US$3.50 — representing the last interest coupon payment — and US$100 for the maturity of the series. What bondholders do with that cash will determine how much of a hit the Central Bank’s coffers takes, as any money re-invested in the Argentine banking system will still be counted as part of its reserves.

The Economy Ministry estimates claim around half of the US$5.9 billion is likely to stay in the country.

If the estimate holds true, it would mean reserves, which currently stand at US$32.4 billion, would fall back to 2014 levels, when a devaluation early in the year and a currency swap with China later on were needed to boost the bank’s coffers.

Before then, reserves have been above the US$30-billion mark since 2006.

“Each investor receiving those funds will see what he or she does with them. We are not desperate to find out what they’ll do,” Economy Minister Axel Kicillof said in an interview published yesterday in Página/12.

The minister highlighted the occasion saying that “it is the biggest bond maturity that’s been cancelled in the last 20 years at least” and that “bigger issues such as that of 2001’s megaswap ended up being defaulted.”

During the Kirchnerite era, only the US$9.8 billion anticipated payment to the International Monetary Fund in 2005 was worth more than today’s disbursement.

Official data reveals that, since debt almost tripled in 2002 — reaching 147 percent of its Gross Domestic Product (GDP) — debt restructurings, cash payments and increased state ownership of bonds has meant that Argentina’s exposure fell to 45 percent in 2013.

Lately, however, the country has taken to issuing debt denominated in both pesos and dollars again.

Federico Sturzenegger, a PRO lawmaker, says that the government’s net debt, which excludes publicly-owned bonds, doubled from 10 to 20 percent of GDP in the last few years. “The process of debt-reduction that the government speaks about ended long ago, and a fiscal deficit that amounts to 7 percent of GDP guarantees that debt will continue to grow rapidly,” he argued.

Old bonds out, new bonds in

The payment of the Boden 2015 bond will be immediately followed by a new dollar-denominated debt issuance, the Economy Ministry announced on Friday. The bond will be issued for a minimum of US$500 million, although it could be extended if there is interest.

The new Bonar 2020 will target local investors mostly, as offering it abroad could lead to new claims from “vulture” funds. The eight percent paid by the new bonds is higher than the seven percent paid out by the maturing Boden 2015, but lower than that of other bonds such as the Bonar 2024, issued earlier this year, which yields 8.75 percent.

The decision to issue a new bond came after weeks of speculation over how the government would act in order to compensate for the dollars that the Central Bank stands to lose after today’s payment, which included talk of a debt swap and even some far-fetched speculation about not paying the Boden or paying it in pesos — a move that would have amounted to a default.

There is no doubt among markets or analysts that the Boden 2015 will be paid today in time and in full. In secondary markets, bonds were last traded at almost the exact same price that the government is expected to pay today, a sign that bondholders see little to no risk of a different outcome.

A swap, meanwhile, was also ultimately ruled out.

But there is also wide-ranging consensus about the fact that more debt will be taken — and that there is private appetite to buy it.

Marina Dal Poggetto, director at the Bein & Associates consultancy agency that works with the Victory Front (FpV) presidential hopeful Daniel Scioli, suggested that authorities could be looking for more than US$500 million. “That figure could be expanded, but authorities are being cautious seeing that last year they announced a US$3 billion auction and couldn’t meet it,” she told the Herald.

“Argentina’s economy amounts to roughly US$600 billion per year and, with the possible exception of Iran, it’s the only country that has not been taking part in international capital markets,” Moody’s Senior Credit Officer Gabriel Torres told the Herald. “So from the perspective of investors this is a rare opportunity, and there is interest, although there would have been more in 2011 considering global conditions.”

Recovering liquidity

While it will make debt smaller, tomorrow’s payment will also reduce the room for manoeuvre that the Central Bank has in order to pay for imports and respond to local demand for dollars without resorting to a large devaluation of the currency.

“Not all of those US$30 billion are readily-usable cash. It is like any regular bank: the Central Bank has that money invested somewhere. It’s hard to know the exact level of reserves that are really available, but you have to take into consideration pending issues such as the debt that the Central Bank has with importers. The next government will have to deal with this problem,” Torres said.

Economists advising Victory Front (FpV) and Let’s Change candidates differ on how to deal with this scenario, with one suggesting taking new debt and the other betting on convincing investors to bring their dollars into the country.

“The situation is comparable to a company that cancels all its liabilities by selling assets but then realizes that it has no capital with which to work. At some point the need to re-capitalize comes forward. Interest rates are going to continue to be low in the world, so the opportunity to do this is there if some pending issues are dealt with quickly,” Dal Poggetto said.

Sturzenegger, instead, argued that a change of leadership would be enough to attract the cash that the Central Bank needs. “The situation is not ideal but not dramatic either, because a Macri government would recreate confidence and bring dollars back to the market,” he said.

@ignacioportes