Sibling rivalry


When Argentina declared its monster default in 2001, it didn’t only trigger mass panic on trading desks across the world. It also immediately set off a chain reaction in the hinterland. From Tierra del Fuego all the way north to the border with Bolivia, cash-strapped provinces were obliged to stop payment on some $20 billion in debt. Leading the pack was Buenos Aires province, Argentina’s largest district and home to the majority of the country’s industry and population.

Unlike the central government, whose take-it-or-leave-it offer of a 75% nominal haircut on $87.5 billion in defaulted bonds angered the financial community, Buenos Aires province pursued a more amicable route. Instead of playing to the gallery with a politically expedient anti-creditor crusade, it did the unthinkable and sought the input of its largely foreign creditors on how to restructure $2.7 billion in defaulted bonds. “We learned a few things watching the reaction to the sovereign’s proposal – it’s only natural we try to do things better,” said provincial economy minister Gerardo Otero in an interview last December.

Creditors immediately held up the province’s efficient, independent handling of its default as evidence of foot-dragging on the part of Argentina economy minister Roberto Lavagna in the sovereign negotiations.

A fresh approach

The province approached its default by first retaining the consulting help of a Citigroup team headed by veteran Latin American debt expert Chris Gilfond. For its services, Citigroup would earn $250,000, says Otero, neither the highest nor lowest fee of the nine investment banks submitting bids. What distinguished Citigroup was its success in brokering previous restructurings for Ecuador and Uruguay – the latter, a $5.4 billion swap in 2003, held up by the International Monetary Fund (IMF) and others as a model of market-sensitive, financial wizardry. “It was [Citigroup’s] track record that impressed us,” says Otero.

After identifying 85% of the province’s bondholders, the bank arranged for Otero to meet with creditors on a six-city roadshow in Europe and the US in November 2003. It couldn’t have been an easy task. Investors, many of whom were also creditors of the sovereign, were still infuriated by Lavagna’s blatant disregard when presenting his restructuring plan at the IMF annual meeting in Dubai two months earlier.

Careful attention was paid to every detail so investors wouldn’t lump the province together with its derelict parent. Provincial legislators, who had final word over the entire restructuring, were brought in to observe the process up close. Instead of imposing terms, emphasis was placed on listening. “We tried to be as humble as possible,” says Otero. “We laid our dirty laundry on the table and waited for reactions.”

By all accounts, the proactive stance paid off. “They showed a real willingness to get a deal done quickly,” says Roberto Krutiansky, director of New York-based Van Eck Absolute Return Advisors, which holds $50 million in Buenos Aires debt and, it is estimated, around $200 million in Argentine bonds. “Dancing around the sovereign’s antagonistic stance required a lot of tact.”

Within weeks of the roadshow Citigroup, along with four other investment banks, rejected Lavagna’s invitation to bid to become a syndicate for an eventual deal involving the sovereign. Citigroup refused to be interviewed for this story.

By contrast, the province’s more coherent approach to resolving its easier-managed debt crisis has won nothing but praise. “Like Uruguay, [BA province authorities have] shown a willingness to get a deal done quickly,” says Siobhan Manning-Morden, head emerging market debt strategist at Caboto USA in New York. “So far they’ve done everything to distance themselves from the sovereign’s approach and manage their affairs independently. There’s no reason investors shouldn’t reward them for it.”

Now, from his palatial office in La Plata, capital of Buenos Aires province, Otero and his advisors are analyzing the feedback they have collected in an attempt to draft a first proposal by the end of March. If accepted by investors, a final deal could be completed within weeks, Otero says.

For its part, a creditor committee has submitted a draft proposal, which would swap BA’s 17 international issues in default for three new instruments: a par option (with no principal haircut but longer 10-year terms and lesser interest); a discount option (with a 20% nominal haircut but higher interests and shorter, seven-year maturity); and finally a new money option that would allow the province to rebuild its credit record and return to the market. Accounting for past due interest, the proposal amounts to a 40% net present value haircut for creditors. Otero refused comment on the specifics of the proposal.

Trouble from the top

In recent weeks, though, a major element of doubt surrounding the entire process has emerged. Perhaps sensing that the legitimacy of his own hard-line stance was being undermined, Lavagna has intervened in the province’s restructuring, say analysts. When the BA legislature, in a rare display of urgency, voted to authorize the restructuring in January, a not-so negligible clause permitting – but not obliging – the province to entrust its restructuring to the federal government was thrown in for good measure. Although Lavagna did not officially sponsor this clause, it is almost inconceivable that he was not involved in its drafting, say analysts, as every economic decision of note must pass through his desk.

Otero insists that the clause is pure protocol since the federal government, through a tax revenue sharing agreement, is the province’s only current source of financing. “We are the protagonists of our own restructuring, but anything we do has to receive the consent of the federal government,” says Otero. “So far they haven’t presented any objections.”

Not everyone believes the province will be left to its own devices. The province’s governor, Felip Solá, has in recent months pursued a closer alliance with Argentina’s popular president Néstor Kirchner. The political pressure to follow the president’s lead and do its part to help in the sovereign’s protracted negotiations may be too difficult to resist. “There’s definitely an element of doubt that wasn’t there [during the roadshow],” says Van Eck’s Krutiansky.

Whether politics prevails over good financial sense will depend on whether or not the province presents a less harsh proposal than Lavagna. “If the province decides to offer the same unfavorable terms as the republic [a 75% nominal haircut and 90% net present value losses], it will be in the same tough spot of a stalemate with investors: widespread rejection of the terms and serious litigation risk,” says Caboto USA’s Manning-Morden.

For the province to successfully close a deal, it will need to balance the need to reduce its debt with the desires of its investors, something the central government has so far lost sight of, say analysts. Otherwise, all the valuable time spent on clever marketing will have amounted to little more than a lengthy exercise in face-saving.

Last December Fitch upgraded the city of Buenos Aires – a separate entity from the province – to B- from CCC, citing the capital’s status as Argentina’s only public entity to successfully complete a restructuring with global creditors since the sovereign’s default. “There’s still time left for the province to save itself,” says Manning-Morden.

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