Magazine article Global Finance

Argentina's Corporates Sidestep Sovereign Debt Debacle

Magazine article Global Finance

Argentina's Corporates Sidestep Sovereign Debt Debacle

Article excerpt

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 Preventive 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 darin 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 bone! 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. …

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