With a bit of theatrical flair, Economy Minister Boudou formally announced the reopening of the 2004 debt exchange. However, the terms of the transaction were far from precise. It seemed that Buenos Aires was still waiting for final approval from the regulators in the U.S., Luxemburg, Japan and Italy. Hence, there was no term sheet. Still, the general framework was in line with what had been rumoured for months. The holdouts will be offered Discount Bonds, with the same haircut as in the 2004 transaction. In other words, for every 100 defaulted bonds tendered, they will receive 33.6 new bonds. Furthermore, they will be compensated for the past due interest (PDI) that was accrued since the original exchange was completed. Given that there were five years of unpaid interest, at 8.28% p.a., the gross accrued will be 41.4 cents. However, this will be reduced by the same haircut as the principal amount, and the resulting PDI will be 13.9 cents. Minister Boudou said that the PDI will be paid in the form of a new bond that matures in 2017. There was no mention of what will be the coupon on the new instrument.
Retail investors tendering up to 50 bonds will receive a new Par Bond and the PDI in cash. This part of the deal was a concession to increase the participation of European retail investors. The government also said that it was not going to recognize prior disbursements from the GDP Warrants. He also failed to mention whether or not the GDP Warrants would be included in the package. However, he did say that the government expected a participation rate of more than 60%. Hence, we believe that they will be included. This means that the deal will be valued at roughly 50 cents. The government is expected to offer additional compensation for investors to tender their bonds earlier, thus pushing the valuation over the 50 cents mark.
The Argentine government’s new posture towards investors reflects the fact that the country no longer wants to be an international pariah. It wants to play a bigger role on the global stage. President Fernandez de Kirchner’s recent starring role in President Obama’s Nuclear Security Summit seemed to have piqued her curiosity. However, it is clear that the country has to resolve its outstanding issues with creditors before being welcomed back into the international camp. This was perhaps the reason why Minister Boudou announced the rough terms of the exchange, even though the regulatory approvals were not in place. Nevertheless, the fact that Argentina wants to put the whole episode behind is a good thing. Many countries are taking a new look at Argentina as a strategic provider of natural resources. Last month, CNOOC, China’s largest offshore oil explorer, took a 50% stake in Bridas, Argentina’s largest oil exporter, for $3.1 billion. Although the two countries are in the midst of a trade dispute, China needs to rely on grain exporters, like Argentina, to satisfy its insatiable demand for food. China’s agricultural sector has low levels of productivity and output. Most of the country’s agricultural land is still subdivided into small plots, reducing the scale needed to justify high levels of investment. China must first create jobs for these peasant farmers before it can implement the land reforms needed to modernize the sector. This gives Argentina, with its highly efficient and productive agricultural sector, a tremendous competitive advantage.
Therefore, we believe that Argentina is on the cusp of an unprecedented expansion, and it makes the GDP warrants highly attractive. We expect the Argentine economy to grow more than 4.5% y/y in 2010. Hence, the warrants should resume payment in December 2011, with a disbursement of more than 3.48. Furthermore, we believe that the economy will accelerate to a growth rate of 5% in 2011, thus raising the payment to 4.11. With the GDP warrants hovering close to 8, investors will be able to recover most of their investment during the next two payments. More importantly, they will still be able recover another 34 cents. At this pace, investors should recoup the entire value of the warrants before the end of the decade. The surprising thing is that the warrants were never so cheap. A few years ago, they peaked at 16 cents. However, the payments at the time were a little more than 2 cents. Now, they are trading at 8, but the payments are almost twice high. If Argentina plays its cards right, a rush of capital inflows and a spike in grain prices could push GDP growth even higher and further boost the payout.
This is why the completion of the debt exchange will mark the start of a very interesting chapter of Argentine history.
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