Argentina Improved the Exchange Offer for its Sovereign Debt under Foreign Law

On July 5, 2020, the Ministry of Economy announced, through a press release, Argentina’s decision to improve the terms and conditions of the exchange offer to restructure its sovereign debt governed by foreign law. The improvement implied an amendment to the original offer, whose terms were provided in the prospectus supplement dated April 21, 2020.

The new terms were approved by means of Decree 582/2020 issued by the Argentine Executive, published in the Official Gazette on July 6, 2020. For more information on the initial offer launched by Argentina in April, the universe of eligible bonds and the structure of that offer, refer to our article Argentina Launched an Exchange Offer for the Restructuring of its Sovereign Debt under Foreign Law.

The amendment to the exchange offer takes place within the framework of the negotiation between Argentina and several groups of bondholders, who had issued press releases expressing their disagreement with the restructuring terms that were initially offered. In this context, Argentina extended the term of the offer five times -which originally expired on May 8- and, after several rounds of negotiations in which proposals and counterproposals of these groups and Argentina were discussed, the country announced an amendment to its offer.

The main changes to the restructuring proposal consist of improvements to the economic terms and amendments to some legal aspects, whose main guidelines are described below. For more information on the new terms and conditions, see the Amended Prospectus Supplement published by Argentina (in English, and the translation in Spanish) and filed with the U.S. Securities and Exchange Commission (SEC) on July 6, 2020.

 

1. Increase in the consideration to be received in the exchange: improvements in haircuts of principal, interest rates and maturities on new bonds

The amendment implies, in general terms, an increase in the consideration to be received by the bondholders in the exchange as a result of reductions in haircut of principal, an increase on interest rates and shorter maturities on the new bonds. Following the criteria of the initial offer, each of the twenty-one eligible bonds may be exchanged, according to the type of bond, for any of the ten new “Bonos Globales de la República Argentina Step Up”, five in dollars (USD) and five in euros (EUR), now with slight changes in the amortization dates (maturities were shortened to 2030, 2035, 2038, 2041 and 2046). The amendment provides for the creation of two additional bonds, one in USD and another in EUR, for the payment of accrued and unpaid interest (see point 3 below). Argentina maintained the structure of pooling bondholders by types of bonds, which was provided in the original offer, having improved the conditions.

(A) Haircut of principal (over the nominal value of the eligible bonds): The initial offer criterion of not making a principal haircut on the Discount and Par bonds (both issued under the 2005 Trust Indenture) is maintained, unless they are exchanged for the longest term bond (2046) in which case they would have a 3% haircut (in the initial offer this haircut was 5%). In contrast, for eligible bonds issued under the 2016 Trust Indenture, the haircut would be of 3% in all cases - except for eligible bonds in Swiss Francs (CHF), which have a haircut of almost 8% - while in the initial offer the haircut for these bonds went from 5% to 18%, depending on the new bond chosen and the currency of denomination (the haircut was greater if a shorter new bond was chosen). In the amendment, this aspect was improved and simplified. Amortization of principal is every six months for all new bonds, as opposed to the original offer which provided annual payments of principal.

(B) Interest rate: interests accrue as from the date of issuance of the new bonds (this is, from September 4, 2020) and will be paid as from September 2021 onwards. The incremental rate (step-up) is maintained, which goes from a minimum of 0.125% for some bonds and reaches up to 5% for some longer-term bonds. This is an important amendment given that the initial offer provided that there would be no payments of interest under the new bonds for three years, and such term has been reduced to one year. All new bonds will pay coupon every six months.

For further details on the terms of exchange of each eligible bond, please refer to the Amended Prospectus Supplement and the financial conditions detailed in Decree 582/2020.

 

2. Possibility of chosing new bonds denominated in dollars (USD) for holders of eligible bonds in Euros (EUR) or Swiss Francs (CHF)

Another change implemented by the amendment is to allow bondholders with eligible bonds denominated in EUR or CHF to choose the new bonds to be delivered denominated in USD or in EUR, subject to the acceptance priority procedures and the specific maximum issuance amounts of each bond.

 

3. Payment of accrued and unpaid interest by means of the delivery of a bond due 2030 for those bondholders entering the exchange

Unlike the initial offer, which did not provide for the payment of accrued interest, the amendment provides the delivery of two new bonds due 2030 (the 1.00% 2030 Bonds in USD or the 0.500% 2030 Bonds in EUR) as consideration for the unpaid interest, accrued until September 4, 2020 for holders who voluntarily enter into the exchange, which would be reduced to the unpaid interests accrued until April 22, 2020 for those holders who are forced to enter as a consequence of the triggering of the Collective Action Clauses (CACs).

 

4. Adjustment of the Rights Upon Future Offers clause (RUFO)

The terms of the Rights Upon Future Offers (RUFO) clause were adjusted to be adapted to the amendments described in the three points above. The initial offer criterion is maintained in the sense that the new longest-term bond (in this case, the 2046 Bond, both in USD and EUR) does not have these rights. Nor will the bonds aimed to pay interest, described in point 3 above, have the rights provided under the RUFO clause.

It should be noted that the RUFO clause grants the holders of the new bonds (except the excluded ones) the right to benefit from the best terms of a potential future restructuring offer to be launched by Argentina within a five-year term as from the issuance of the new bonds.

 

5. Preservation of the 2005 Indenture for eligible bonds subject to that contract

One of the most controversial legal aspects in the negotiations revolved around the request of the bondholders whose eligible bonds were issued under the Trust Indenture of year 2005 (that is, the holders of Par and Discount bonds in USD and EUR) to keep the same terms and conditions of such contract in their new bonds. The reasons alleged by the group of creditors that represented these bondholders is that the 2005 Indenture provides terms which are more favorable to the creditor than the Trust Indenture of 2016.

The initial offer provided all new bonds to be issued under Indenture 2016. Through the amendment, bondholders currently subject to the Indenture 2005 may exchange their eligible bonds for new bonds to be issued under such Indenture 2005.

 

6. Inclusion of minimum participation thresholds as a condition to consummate the exchange

The amended offer includes minimum participation levels as a condition to consummate the exchange offer. Argentina will only be able to implement the exchange if it reaches one of these two thresholds:

(A) Minimum level of participation in the aggregate: if Argentina receives tender orders representing at least 66.66% of the aggregate eligible bonds; or

(B) Minimum level of participation by Indenture: if Argentina receives tender orders sufficient to amend:

(1) (a) one or more series of eligible bonds issued under the 2005 Indenture representing at least 60% of the aggregate eligible bonds under such contract, or (b) representing more than 50% of the aggregate bonds under the 2005 Indenture; and

(2) (a) one or more series of eligible bonds issued under the 2016 Indenture representing at least 60% of the aggregate bonds under such contract, or (b) representing more than 50% of the aggregate bonds under the 2016 Indenture.

 

In accordance with the provisions of the amended offer, Argentina cannot modify or waive this condition of minimum levels of acceptance to consummate the exchange.

 

7. Other significant aspects regarding the amendment to the offer

The exchange offer will be open, in principle, until August 4, 2020, unless Argentina extends this term or terminates the invitation earlier. The settlement of the new bonds is scheduled for September 4, 2020.

For those bondholders who had already accepted the invitation to exchange before the publication of the amended prospectus supplement, no further action would be needed since they will be deemed to have accepted the amended offer, unless they decide to revoke their tender order.

As to the initial offer, the new offer provides maximum issuance amounts and acceptance priority procedures for the exchange for some new bonds.

Those bondholders who do not voluntarily enter the exchange but that, as a result of Argentina obtaining the majorities provided under the collective action clauses (CACs), are forced to exchange, will receive the longest bond (2046), which is excluded from the RUFO clause.

While there are groups of bondholders who have publicly expressed their acceptance of the terms of the offer, there are others who have expressed their disagreement.

Regardless of the minimum acceptance thresholds as a condition to implement the exchange that the amendment included as something new, the process of obtaining the required majorities under the collective action clauses (CACs) to which Argentina is subject to in the two Indentures (2005 and 2016) that govern the bonds subject to the exchange must be followed closely. It remains to be seen if Argentina implements the new mechanism called “re-designation” in practice, which would allow the country to determine the series of bonds to be included in the exchange at the closing of the offer or after the acceptance period, and may exclude some of them so as to modify the calculation basis of the majorities.