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UPDATE 1-Argentina awaits new bond proposal from "holdouts"

Published 02/03/2009, 03:31 PM
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By Hugh Bronstein

BUENOS AIRES, Feb 3 (Reuters) - Argentina is ready to restructure its remaining defaulted bonds as soon as creditors revise a debt swap plan that has been scuttled by the world credit crisis, sources close to the situation said.

Argentina defaulted on some $100 billion in debt in 2002. It restructured those obligations three years later in a transaction that sharply cut returns to holders, about a quarter of whom rejected the deal.

A complete revamping of the country's bad debt would rehabilitate Argentina in the eyes of Wall Street and help set the stage for sustainable growth once the international economy picks up again.

In 2008 the government was considering a proposal from those "holdout" creditors for a reopening of the restructuring in which investors would buy an additional $25 in new Argentine debt for every $100 in bonds tendered.

Since then the world financial crunch has made it hard for investors to come up with that 25 percent in fresh cash. So Argentina wants the holdouts to come up with a new proposal.

"The government would like to reopen the restructuring as soon as it gets a new, acceptable proposal," said a government source with knowledge of the situation.

"The timing depends on what kind of deal can be negotiated between the holdouts and the government, given the global backdrop," said the source, who asked not to be named.

One New York-based holdout investor, who also spoke anonymously, said the idea of any fresh cash being part of the restructuring "has become unrealistic in this market environment."

Barclays Capital, Citibank, and Deutsche Bank would manage the reopening of the restructuring, which is expected by investors to be based on the same 66 percent "haircut," or debt forgiveness plan, as was included in the 2005 deal.

Last month a New York federal judge said Argentina must pay $2.23 billion to creditors who decided to sue rather than wait for new negotiations, the latest court decision to put pressure on the government to settle with its holdout investors.

Since its shock currency devaluation and default seven years ago, Argentina has gone through an economic boom that is now faltering as prices for its agricultural exports are pressured lower by weaker demand.

The government has moved to improved its credit profile with moves such as last month's swap of so-called guaranteed loans. But its borrowing costs have been held high by its unresolved default.

Argentina's risk premium is 1,481 basis points compared with the wider market's 634 basis points, as reflected by JP Morgan's Emerging Markets Bond Index Plus <11EMJ>.

Holders of defaulted Argentine paper have been hit like everyone else by the global credit crunch, increasing the incentive for them to swap non-performing bonds for interest-bearing assets.

"It is likely that the government will try to restructure it defaulted bonds some time in the first half of 2009," said Carola Sandy, a New York-based sovereign strategist with Credit Suisse.

"Both sides are motivated," she added. "A restructuring would strengthen the government's message that it wants to improve its relationship with the market. It would also give bondholders a more liquid Argentine asset." (Reporting by Hugh Bronstein)

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