* The changes made to the latest restructuring
proposal to be presented to the SEC do not significantly modify
the value of the bonds (between USD 25 and 28).
* The Par bond is mainly aimed at retail investors
(and has no reduction); the Discount bond is aimed at overseas
institutional investors (shorter maturity and a higher interest
rate); and the Quasi-Par bond at AFJP's (private pension funds)
(long term and indexed with CER).
* For the time being, the Government is assured
of around 30% participation by local institutional investors.
* The proposal foresees a fall in the debt burden
from 140% to 80% of GDP and annual interest payments of between
USD 1 billion and USD 1.2 billion (0.5% and 0.6% of GDP).
* It also envisages the resumption of negotiations
with the IMF on concluding the agreement signed last year and
on targets for next year.
* In the long term, a favourable scenario for
investment will be key to avoiding pressures on domestic prices
and to advancing to sustained growth, for which a successful restructuring
programme is an important necessary condition.
* The Economy Ministry has presented its final
prospectuses in all the relevant markets. The exchange of securities
will take place between 29 November and 20 December, and again
in the two weeks prior to 17 January.
* However, in recent days several delays have
occurred in the approval process for the operation abroad, although
the Economy Ministry plans to adhere to the original timetable
beginning with the swap in local markets.
_____________________________________________________________________
In early November, the Economy Ministry presented
to the US Security Exchange Commission the final prospectus for
the bonds which are to be used in the restructuring of the public
debt. Several changes have been made to the proposal presented
in Buenos Aires in June this year. One of the main differences
is that the date of issuance of securities has been brought forward
from 30 June 2004 to 31 December last year, meaning that the government
will need to pay an extra USD 465 million in interest payments
accrued. Par bond interest rates have been reduced in the first
five years to 1.33% per year, while Discount bond rates now stand
at 8.28% a year.
Meanwhile, a quota of USD 50,000 per person
for Par bonds was confirmed (with no capital reduction), and is
designed to raise the level of acceptance among retail investors,
while for Quasi-Par bonds the minimum participation was rise to
USD 350,000. Moreover, a "most favoured creditor" clause
establishes that if within 10 years of the exchange, Argentina
should offer to buy, swap or change any of the bonds that did
not participate in the swap, new bondholders will be given the
opportunity to participate in the operation. Finally, the Economy
Ministry explained that if acceptance should be under 100%, the
remaining payment capacity envisaged for new unplaced bonds will
be used to repurchase debt (another form of stimulating greater
participation in the operation).
However, these changes do not significantly
modify the value of the bonds compared to the Buenos Aires proposal.
Depending on the discount rate, the price of the bonds will be
between USD 25 (11% annual rate) and USD 28 (10% annual rate)
for each USD 100 of nominal value.
THE CONDITIONS OF ISSUANCE OF THE NEW
BONDS
PAR DISCOUNT QUASI-PAR
--------------------------------------------------------------
Amount issued USD 15 bill. USD 18.5 bill. USD 8.3 bill.
Maturity 35 years 30 years 42 years
Currency USD, yens USD, yens $
euros or $ euros or $
Indexation CER CER CER
of capital
Capital 0% 66% 30.6%
reduction
Capital Semiannual Semiannual Semiannual
amortization from year 25 from year 20 from year 32
Interest 1.33% to 8.28% 5.57%
rate 5.25%
Int. payments Semiannual Semiannual Semiannual
Interest No 4.35% (1-5), 5.57%
capitalization 2.55% (6-10) (1-10)
Applicable USA, UK, USA, UK, Argentina
law Japan & Arg. Japan & Arg.
--------------------------------------------------------------
Source: CEI based on Finance Ministry data.
The features of the bonds were designed in such
a way as to best suit the different types of creditors. The Par
bond would probably be aimed principally at retail investors,
since it gives preference to preserving the capital (it has no
reduction). The Discount bond, on the other hand, would enjoy
greater preference among overseas institutional investors, who
may be interested in the international legislation governing the
securities and in the flow of funds generated by the bond, which
has a shorter maturity period and pays a higher interest rate
than the Par bond, while the Quasi-Par bond is aimed at AFJPs
(private pension funds), since it is a very long-term bond (10
years of interest capitalization), is subject to local legislation,
offers a better interest rate than the Par bond, and the capital
reduction is equivalent to accepting conversion to pesos at AR
$ 1.4 plus CER (as with the guaranteed loans).
Under this new plan the number of currencies
is also reduced. In the case of Par and Discount bonds, the current
debt securities denominated in dollars, euros or yens may be exchanged
for new debt securities denominated in the original currency of
the debt instrument in dollars or pesos (indexed against CER);
the present securities denominated in different currencies to
those indicated could be exchanged only for new titles expressed
in dollars, euros or pesos (indexed against CER), while the present
debt titles denominated in pesos will be exchangeable only for
new securities in pesos (indexed against CER). In the case of
the Quasi Par bond, there will be a single denomination in pesos
indexed against CER.
All the bonds will include an additional detachable
coupon linked to the evolution of the local economy. This means
that an additional payment will be made when the economy grows
above a certain level. This coupon linked to GDP growth will mature
in 30 years and will be payable in December each year. In order
to define the time and the amount of the payment, a base scenario
is envisaged from the end of 2004. When GDP in a given year exceeds
the level marked out under that scenario and records simultaneous
expansion of over 3% annually, the payment of the additional coupon
is triggered. This payment is calculated as 5% of the difference
between current GDP and the GDP of the base scenario (measured
at current values) and is expressed in the currency of the corresponding
bond in accordance with the market exchange rate.
WHICH IS THE LEVEL OF ACCEPTANCE?
For the moment, the government is assured of
around 30% participation by local institutional investors, such
as AFJPs, banks, mutual fund administrators and insurance companies.
Aside from any speculations as to the possible
level of acceptance for the proposal, for the moment the market
seems to be taking an optimistic stance regarding the result of
the operation, as witnessed by the recent rise in domestic securities,
although the international situation, with a fall in long-term
interest rates, also helped to raise the value of local bonds.
Thus, dollar-denominated BODEN with maturity in 2012 rose 30%
between early May and early November.
In order to maximize the acceptance level the
design of the payment mechanism for the new securities will be
important, to prevent creditors rejecting the proposal and having
recourse to the law in an attempt to hinder the exchange operation.
Meanwhile, the question of majorities in the different defaulted
titles will be important, as it will allow the conditions of issuance
of the old bonds to be altered in order to discourage creditors
who plan to use legal way (so-called escape clauses, or collective
action clauses, in accordance with the different legislations).
The Economy Ministry has already presented the
final prospectuses in all main markets: United States, Germany,
Luxembourg, Italy and Japan. By 22 November, the Argentine proposal
will have won approval, at least in the United States, at which
time the road show of public officials in the Economy Ministry
will get under way. The formal exchange of securities is planned
to begin on 29 November in those jurisdictions that have given
their approval, while those who are still to do so will be incorporated
at a later date. The operation will last until 20 December, and
will then reopen in the two weeks prior to 17 January.
Nevertheless, several difficulties have arisen
that could lead to delays in the exchange process. Firstly, the
securities commission in Italy has announced that it will only
be able to define the proposal at the end of December. Meanwhile,
the Bank of New York has desisted from acting as exchange agent
for the operation, and this could delay approval in the US SEC
(since another bank will have to be chosen). Nevertheless, the
Economy Ministry will try to maintain the original timetable and
the exchange operation in the local market will begin at the end
of November.
IMPACT ON PUBLIC ACCOUNTS
If arrears in capital and interest are included,
the defaulted debt, principally in the form of bonds, amounts
to USD 100 billion, which represents 58% of total public debt.
The remainder of the debt, which is being paid normally, consists
of loans to multilateral institutions, guaranteed loans, the provincial
bond and the BODEN.
The proposal made is an important step towards
normalizing public accounts. If there were generalized acceptance
of the offer, the design of the new bonds would involve a reduction
in defaulted debt (including arrears) of around 60%. Therefore,
the debt burden on GDP would fall from the current 140% to a level
of 80%, which is still relatively high when compared to the 2001
ratio of 54% before devaluation and default.
However, what is important is that due to the
features chosen for the new bonds, with capital payments only
in the last 10 years of life of the securities and with interest
capitalization in the first 10 years (in the case of the Discount
and Quasi-Par bonds), the payment of interest will be low in the
first years: between USD 1 billion and USD 1.2 billion a year,
i.e. between 0.5% and 0.6% of GDP.
IMPACT ON THE ECONOMY
In addition to the importance of the public
accounts normalization process, a successful exchange will make
way first of all for the resumption of negotiations with the IMF.
The review of the agreement signed in September last year, for
which fiscal and monetary targets are being met, is pending, as
is the discussion of a new agreement for 2005 and 2006.
Secondly, a successful operation would be an
important step in normalizing Argentina's access to international
capital markets, which could raise confidence in the country and
lead to the entry of capital from abroad and to pressure for a
fall in the value of the dollar.
Maintaining the value of the US currency will
require intervention in the exchange market, which will be reflected
in future issue of pesos. In the short term, the Argentine Central
Bank has instruments to neutralize issuance and avoid pressures
on domestic prices, such as the use of bills and notes (BCRA debt),
the return of rediscounts by the banks and currency purchase by
the National Government with primary surplus to pay foreign debt.
However, the economy still has idle capacity, which is reflected
in a level of utilization of installed capacity of around 70%
in industry, and in an unemployment rate of around 13% in the
labour market.
In order to avoid a sudden appreciation of the
local currency, the monetary authority could increase controls
over short-term capital income. At present capital coming from
abroad in the form of financial loans or portfolio investments
(purchase of shares, bonds, mutual funds) must remain in the country
for a minimum of 180 days before being repaid.
However, in the long term, the generation of
a climate favourable for investment will be key to expanding the
frontiers of the economy, avoid potential pressures on domestic
prices and ensure a smooth path for the real exchange rate, for
which a successful public debt restructuring is vital.
UPDATE:
SWAP OF DEBT WAS POSTPONED TO JANUARY
Some recent difficulties in the restructuring
process forced the argentine Government to delay the beginning
of the swap that was previously scheduled to start at the end
of November.
Firstly, the securities commission in Italy
has announced that it will only be able to define the proposal
at the end of December. Meanwhile, the Bank of New York has desisted
from acting as exchange agent for the operation, and this could
delay approval in the US SEC (since another bank will have to
be chosen).
Thus, the Government decided to postpone the
swap operation to January the 17th (the operation will last until
February the 25th).
It's important to remark the complexity of the
restructuring process, which includes: 152 bonds, 7 currencies
y 8 different legislations, and also the participation of 40 different
actors (like local and international banks, law bureaus, clearing
systems and regulation entities). In this context, is normal to
expect complications in the process, as has been recently recognized
by the international banks that advice the Government in the operation.
¨Could this difficulties complicate the
expansion of the economy? The change of schedule delays the negotiations
with the IMF, which may begin after the end of the swap. This
situation implies that the Government will have to make capital
payments to the international agencies of USD 1.5 billion during
the first quarter of next year.
Although the end of the swap and the renewal
of negotiations with IMF are important to normalize the financial
relations of Argentina with the international community and facilitate
the access to external savings (loans or foreign direct investments),
until now the economy grew without the help of this financing
source, thus a delay of two or three months will not generate
significant complications.
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