Author: Santiago Fittipaldi
As talks between Argentina’s government and its creditors have turned more contentious, corporations have found better ways to overcome their debt woes.
For Argentina’s corporations these are frustrating times. Following the December 2001 Argentine peso devaluation and sovereign default, many corporates were also forced to default, a move that immediately barred them from the capital markets that had been a major source of long-term financing. Many are still stuck in limbo as the Argentine government maintains its standoff with bondholders over its proposed $100 billion debt restructuring—the largest in history.
Others, though, have decided not to wait. They are well aware that ending the impasse over the defaulted sovereign debt would set a benchmark for future corporate restructurings and help solidify the nation’s recent economic recovery by bringing back investment and paving the way for a broad-based return to international capital markets. But they would rather hammer out debt workouts of their own.
The figures show how effective their efforts have been. In 2002 defaults were rampant, and there were few restructurings. In 2003 the incidence of new defaults had tailed off, and a barrage of debt renegotiations occurred that led to $1.63 billion in corporate restructurings. So far this year, there have been no new defaults and some $1.5 billion in debt workouts.
The mechanism of choice for Argentine corporate restructurings has been the Acuerdo Preventivo Extrajudicial (APE), through which companies reach out-of-court agreements with creditors. Under the scheme, the company presents bondholders and other creditors a proposal with several offers as to how it can repay the debt, usually involving a discount or “haircut.” Once the majority of creditors accepts the plan, it is presented to a judge, who, after verifying that there has been approval from more than 50% of creditors representing 66% of the debt, can rule to force all creditors—including those who rejected it initially—to adhere to its terms.
Local corporates say the APE is the simplest mechanism available to them and avoids a lengthy and more costly in-court bankruptcy protection process. Under the APE, available even to companies that want to renegotiate without having defaulted, there are no deadlines set to complete a deal, for which there is enough flexibility to modify the terms of an offer depending on feedback or input from creditors themselves. There are also no pre-set limits on the amount of debt forgiveness that a company can seek. In the end, an APE is a private contract between a company and its creditors that, once resolved, allows the company to get back on track by setting a more realistic repayment schedule.
An APE is not always a smooth process. Many negotiations have dragged on for months and even years as both sides attempt to find common ground between what a company feels it can pay and what creditors expect in return. Some processes have also been delayed by legal challenges along the way. Multicanal, a cable television operator controlled by the local Clarin media conglomerate, is a case in point. The company restructured $525 million of defaulted debt, but only after not only doing battle with US-based Huff Asset Management, which held $158 million worth of Multicanal debt and challenged the deal in court, but also after having heeded calls from creditors for an equity stake as part of the workout.
A Buenos Aires court ultimately approved the Multicanal restructure deal, under which bondholders can choose to exchange the defaulted debt for 10-year bonds paying 2.5%-4.5%, 7-year bonds at 7% plus shares in the company, or a cash buyback offer. Bondholders in a $1.4 billion bond and bank debt restructure for Banco Galicia, a local commercial bank, also pushed for an equity participation package after having agreed to a par package consisting of a 10-year bond and a subordinated issue. The improved bondholder-driven offer from Galicia includes a mix of 6-year bonds and preferred shares that convert into common B shares after one year.
It appears foreign-owned companies have also faced the issue of bondholders calling on parent firms to improve workout offers from local subsidiaries, charging that the parents are not facing the same financial constraints and can therefore lend a hand. Telecom Argentina, a local telecom company controlled by France Télécom and STET, is one such example. The company, which registered Argentina’s largest corporate default ever in 2002, at $3.2 billion, is seeking to restructure $2.55 billion in a deal in which Morgan Stanley and MBA Banco de Inversiones are advisers. Although the company has already improved its offer by cutting the net present value (NPV) loss in its proposal to 20% from a previous 50%, creditors say it’s time for the European parents to make it even better.
The most draconian offer so far came from Sociedad Comercial del Plata (SCP), an oil and entertainment conglomerate, whose proposal to creditors included a hefty 80% NPV loss—the largest to date and not much different from the sovereign’s offer of a 75% loss for its own bondholders. While SCP’s proposal raised eyebrows and unleashed concerns that it could set a precedent, market analysts noted that the company defaulted in 1999, much before the sovereign, and had both negative cash flows and problems at the holding company level. As such, creditors had had little hope of recovering much more than they did after a restructure that took three years to complete.
So far, most of the companies that have successfully restructured their debt have done so by offering to buy back defaulted bonds through cash offers at discounts of between 50% and 80%, offers of new par bonds with long-term maturities of eight to 14 years, or offers to increase repayment amounts in the event that the companies obtain greater-than-anticipated revenues, among other options. The most common options to date have involved combinations of par bonds and shares, with the most successful deals also adding a cash amount up front.
Guillermo Corzo, an economist with Fundacion Capital, a Buenos Aires-based economic think-tank, estimates 30% of defaulted corporate debt has already been renegotiated, although conceding that the process has been slowing down in recent months as corporates await the outcome of the controversial sovereign debt workout to set a benchmark. Yet companies are far from being out of the woods. Fundacion Capital data show corporate bonds falling due this year (principal and interest) amount to $4.14 billion, followed by another $2.4 billion in 2005. The petroleum, telecom, food, banking, energy and gas sectors account for 78% of the amount falling due this year.
Although oil companies and major exporters should have little problem in meeting debt obligations amid an export boom and high commodity prices, Corzo is concerned about the government’s reluctance to conclude tariff increase negotiations with utility companies, which could presage further defaults. “Telephone, gas, electricity and water companies had been charging tariffs at a rate of one peso for one dollar, and suddenly they were forced to deal with the new reality of three pesos for one dollar but were banned by the government from raising their rates,” says Corzo, who feels authorities may be looking to postpone a decision on tariff hikes until next year to avoid an inflationary spike.
“Restructurings in Argentina or anywhere else are just a way for companies to admit that they can’t pay their debt but are willing to work something out with creditors, and for creditors who feel it’s better to take a loss but not lose everything if the company is forced into bankruptcy to get something back,” says one investment banker. “So it’s nothing more than a stop-gap measure that doesn’t really offer a long-term solution to a company’s problems.”
With companies issuing new debt to meet their obligations under their debt workout programs, they will be able to service the new debt only if the government does its part to foster long-term macroeconomic stability—which is why local corporates are calling for a resolution to the sovereign’s debt impasse. If not, some warn the recent debt restructurings will only have postponed the problem— as any macroeconomic deterioration, including a further slippage of the peso, could lead to a new corporate debt crisis in the near future.
Meanwhile, companies are benefiting from the recent economic turnaround. In 2003, GDP grew by 8.8%, ending four years of recession that saw a 19.6% economic contraction between 1999 and 2002. “Firms that are successful can still finance themselves, but others are just deferring payments on their existing debt and cutting spending, which allows them to continue operating,” says Rafael Ber, a partner at Argentine Research, an independent research and analysis firm focused on corporate finance and capital markets.
Firms Take Non-Traditional Route
“The recovery in the level of activity seen in some economic sectors, principally those linked to exports, has prompted a considerable number of small and medium-size enterprises to seek financing through non-traditional financial instruments,” says a Fundacion Capital report. Among alternatives being used are instruments offered by the Buenos Aires stock exchange, including financial trusts and locally traded short-term paper with six-month maturities. Other companies have reopened the IPO market with new listings.
During the first half of this year, domestic corporate bond issuance was $1.32 billion, of which $229.6 million were short-term deals of 12 months or less and $1.09 billion were long-term issues. Yet only 14.4% involved new issues—a $100 million oil company deal and a peso-denominated issue for the equivalent of $56.3 million by a telecom provider—while the remainder involved paper issued to satisfy debt exchanges or workouts. Banco Hipotecario, the country’s largest mortgage lender, for example, issued $778 million in new debt this year, but only to meet obligations under its debt restructuring.
“Argentine companies have to be commended for how they’ve been able to face the challenges presented by this latest financial crisis,” says the investment banker. “Compared to the government, which is still fighting with creditors over the sovereign default, companies have moved more quickly to get their deals done and move on. It would be ideal if the government would resolve its own issue too, but don’t forget that the Argentine government’s first default was in 1828 and that it was not fully resolved until 1957.”
|Argentine Banks Take The Road To Recovery|
Argentine banks have been on a roller-coaster ride. Just prior to the devaluation, the government had imposed a freeze on withdrawals that remained in place until December 2002, in an effort to stem a run on deposits. Bank assets, calculated in dollars during the country’s 10-year convertibility period during which the peso was kept on par with the dollar, were transferred to pesos at the new exchange rate of three to one. The process, locally referred to as “pesification,” was later ruled illegal in March 2003. In between, deposits were converted into 10-year government bonds, and there was even a point in April 2002 when all banks were shut down altogether.
While the government experimented with desperate measures to avoid a financial sector collapse, some frustrated depositors rioted and attacked several bank branches. The end result was a massive loss of confidence in the nation’s banking system—which is only now being restored, albeit cautiously. Banking executives, however, say there is still much that needs to be done before Argentines take what little savings they have left from under their mattresses and begin their trek back to their local banks.
According to the central bank’s monthly economic report, the financial sector as a whole posted net profits of 420 million pesos ($140.75 million) in May—the sector’s first profitable month this year. Part of the turnaround was due to successful debt restructurings by three local institutions—Banco Provincia, Banco Nacion and Banco Galicia—which posted 170 million pesos ($56.97 million) in May profits. Another contributing factor was the improvement in non-performing loans, to 22.6% for private banks in May, as improved earnings among corporate borrowers also increased their repayment capacity.
Lending activity is also on the rise, although the Argentine Banking Association (ABA), which groups foreign-owned banks, contends foreign institutions are leading the increase, accounting for 43% of the net increase in private sector bank credits and 50% of credit card financing in June. Central bank president Alfonso Prat Gay begs to differ, claiming it is local banks that are being aggressive in boosting credit supply.
Certainly, foreign banks seem to have less tolerance for Argentina’s financial upheavals. Eight foreign banks, including Scotiabank, Credit Agricole and Banca Nazionale del Lavoro, have exited the country since 2001. Lloyds Bank has recently put its local assets up for sale as well, ending a 140-year presence in the market.
Bank activity continues to be limited by the large amount of government bonds in banks’ portfolios, while bankers also contend there is a mismatch between deposits and loans, since depositors favor short-term variable-rate deposits while borrowers are demanding fixed-rate long-term credits. “Banks still have a low level of activity, but they really aren’t more aggressive because they themselves have not yet fully improved their situation,” says Rafael Ber at Argentine Research.
While bankers charge there is credit available for corporate borrowers—albeit mainly short-term loans—what is still lacking is demand. Critics contend banks, which are now focused on regaining business from small and medium-size enterprises, are setting requirements that many clients can’t meet, while others believe it’s a matter of changing bankers’ mindsets. Banks in Argentina, they say, must consider the full background of loan applications for investment projects instead of focusing strictly on the loan application. This, critics add, is why last year’s tourism-sector construction boom was financed mainly with foreign capital.
Others argue the government must spearhead efforts to restructure the banking system to restore stability and regain confidence lest it remain vulnerable. “Confidence is gained over years and lost in minutes,” says Carlos Heller, president of the Association of Argentine Public and Private Banks (ABAPPRA). Guillermo Corzo, an economist at Fundacion Capital, seems to agree and says the sector’s full recovery, which will also have a positive impact on the overall corporate recovery, “is a matter of time, stability and doing things right.”