Argentina: Sharpening Pencils

As the Argentine debt exchange marches closer, investors are taking another look at the valuation of the deal. Although the government has yet to produce a term sheet, many of the parameters are known. To begin with, investors will be allowed to tender their defaulted bonds for Discount bonds. The government said that the Discounts will be the same as the ones that were issued more than five years ago. That means that the new bonds will have a factor of 1.27. We must recall that under the terms and conditions of the original exchange, the Discounts had a coupon of 8.28%. However, 3.97 was paid in cash for the first three years, and 4.31 was capitalized. Furthermore, the bond began accruing interest as of December 31st, 2003—which further boosted the factor.

As of January 1st, 2009, the cash portion of the coupon was increased to 5.77, and the capitalized amount was decreased to 2.51. The factor (1.27) is the sum of this capitalization. Given that creditors will receive 33.3 bonds for each 100 bonds tendered, the notional value of the principal amount will be 33.3 times 1.27 times the market price of the Discounts, which are currently trading at 75.5 cents. The product equals 31.93. However, this needs to be multiplied by the scaling factor of the individual bonds that are being tendered. Dozens of different sovereign bonds went into the exchange, each with different coupons and characteristics. The government also recognized the accrued interest which the individual bonds accumulated since the payment of the last coupon. The scaling factor for each ISIN and CUSP was outlined in Annex C of the Prospectus. This scaling factor could be as much as a few points, which will boost the valuation of the principal amount.

In addition to the principal amount, creditors will receive accrued interest on the Discounts. This was the cash disbursement that was made since the Discounts were issued at the end of 2004. The government will recognize this amount in the form of a new seven-year PDI bond, which will have a coupon of 8.75%. Assuming that the government recognizes 6 ½ years of accrued interest, the notional amount will be 28.51. This is the compilation of the different coupon payments that were made. However, it needs to be reduced by the 66.7% haircut that was also applied to the principal amount, which reduces the par value of the PDI to 9.58. This valuation falls to 8.91, when it is put in the form of a seven-year bond yielding 10%. Last of all, it is rumoured that the government will give a GDP warrant for every 100 bonds tendered. The dollar warrants currently trade at a price of 8. Therefore, the sum of the principal amount, plus PDI notes and GDP warrants equals 48.84. It is said that the government will provide a monetary incentive to institutional creditors who tender early. We also need to include the scaling factor. This means that the value of the exchange should be slightly more than 50 cents on the dollar. An improvement in the price of the Discounts and GDP warrants will further boost the valuation.

The valuation of the euro-denominated bonds is similar, but not the same. The haircut of 66.7 was the same as the dollar bonds, but the coupons on the euro notes were only 7.82%. This reduced the factor to 1.25. The cash portion of the euro-denominated Discounts, up to December 31st, 2008, was 3.75% and the capitalization was 4.07%. Afterwards, the cash portion increased to 5.45% and capitalized amount fell to 2.37%. Therefore, the notional amount of the PDI is 26.93. The application of the 66.7% haircut reduces the PDI to 9.05. Assuming that the new euro PDI bond also trades at a yield of 10%, the value falls to 8.41. The value of the GDP warrant in euros is significantly less than the dollar notes. It trades a little more than a point behind. Currently, it is trading at 6.8. Hence, the sum of the euro principal amount plus euro PDI plus the euro GDP warrant equals 42.69. With the untendered dollar bonds trading at 48.5 and the euro notes at 41.5, the instruments seem to be fairly valued.

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One Response to "Argentina: Sharpening Pencils"

  1. Guest   April 29, 2010 at 9:06 pm

    What do you think is the chance bondholders which do not enter this new swap have ,to recover more from its original investment in argentine bonds, if they have already a favourable sentence in NY courts?