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Argentina – is the next stop debt restructuring?

Following a political about-turn, Argentine volatility raises questions for bondholders.

Argentina’s transformational election in 2015 promised the electorate, and investors, a new market-friendly vision for the country.

In 2019, voters reversed the direction of travel completely, effectively bringing back the old government and expunging the technocratic policymaking of the Macri administration.

The August primaries foreshadowing the October election result prompted a sharp drop in bond prices, which should serve as a cautionary tale for investors looking to invest not only in Argentina but in Latin America in general from the perspective of shifting political landscapes.

That said, great volatility can bring great opportunity and Argentina is no different in this regard. The final recovery prices of the bonds are likely to be determined by three-way discussions between the government, the IMF and bondholders.

In our view, cashflow relief over the next few years should be the government’s priority even while it seeks to share the burden of adjustment between the domestic population, bondholders and multilateral creditors.

A fiscal adjustment will, in our view, be inevitable, whether to comply with a renegotiated IMF programme or to adapt to the absence of alternative financing sources, but the Fernandez government will hope to backload any austerity push and generate a short-term growth boost in the meantime.

As a result, we expect maturity extensions and near-term coupon holidays, but do not see a need for nominal haircuts.

Additionally, in our view holders of front-end bonds are in a good position to resist being subordinated to debt falling due to the IMF in 2022 and 2023, and therefore to remain at the front of the queue.

The restructuring process is yet to get underway but with the above in mind, we favour short-dated bonds and tactically deploy downside protection via medium-term CDS instruments (where possible).

Our recovery value analysis shows that the likely recovery in the short end should be in a 60-70 range with current bond prices in the low 50s. This provides potential opportunity on the upside.

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