When Argentina did its very creditor-unfriendly debt swap in 2005, a large number of bondholders held on to their defaulted paper rather than let the country buy it back for a pittance. The holdout strategy had after all paid enormous dividends in countries such as Peru, Brazil, Ecuador, and Uruguay. The stakes were much bigger in Argentina, of course, but a large number of aggressive creditors had no intention of letting Argentina off cheaply.
Their strategy didn’t work, and since the Argentine default “holdout” creditors, as they’re known, have received very short shrift in other countries too, like Ecuador and Liberia. And now it seems that they’re more than willing to capitulate in Argentina, tendering their bonds in a deal that’s worse than the original offer, plus offering to lend $1 billion in new money.
The new deal has been put together by Barclays (f/k/a Lehman), which reportedly has found bondholders with $8 billion (face) of debt who are more than willing to pay all of Barclays’ fees and take pretty much exactly the same offer which they rejected in 2005. If the deal goes through, there will still be many billions of dollars’ worth of holdouts, but most of them will probably be judgment creditors rather than bondholders, which means that they’re basically ruling themselves out of any bond-swap exit.
The defaulted debt is trading in the high 20s right now; if and when this deal happens, it could go even higher. That’s because according to market rumor, the deal as it’s currently structured will have quite a tasty GDP warrant sweetener.
Of course, anybody who tendered into the original exchange, in 2005, got GDP warrants too, it’s true. But no one valued them at much more than zero at the time. It was only over the subsequent years of explosive growth in Argentina that the warrants started becoming extremely valuable to bondholders. This deal is existing bondholders’ chance to get in on that lucrative GDP-warrant action. And better yet, the Argentines even seem willing to give the holdouts all the old payouts on the GDP warrants, in the form of some kind of security — depending on the secondary-market value of those securities, that could be worth a lot of money. Argentina even is considering, or so I’m told, paying past-due interest on its repudiated Discount bonds all the way back to 2003, again in the form of new bonds.
What’s in it for Argentina? Well, for one thing, it gets $1 billion of new money from the bondholders represented by Barclays. But much more importantly, this deal, if it really does get up to somewhere in the $8-10 billion range, might well be enough to reopen conversations with the IMF, which is currently refusing to have anything to do with this deadbeat creditor.
Argentina’s running out of money, and although I’m sure a lot of investment banks might be willing to try and underwrite a new bond deal if this exchange goes well, I doubt there’s that much appetite out there for new Argentine global bonds, especially now they’re yielding less than they have done in years. The IMF I think would love to find an excuse to start working closely again with Argentina — which is, after all, a fully-fledged member of the G20. And in turn Argentina would love to have access to IMF liquidity. If it needs to do some kind of bond swap in order to make that happen, then so be it.