Debt swap: most new bonds will remain linked to the evolution of inflation

Thursday’s peso debt swap will include a majority of new bonds linked to the inflationwhile the option “double” which protects against rising prices and also against a possible devaluation will take place until February following, according to the fine print of the offer that the Ministry of Finance announced on Monday.

On the market, they estimate that the banks could mainly turn to securities indexed to the CER. In the official offices they admit that it will be difficult for the exchange to have a membership level like those who had previous occasions (which came to exceed 70%) since it is a conversion operation for longer termswhich means that not all holders can automatically participate in the offer.

The exchange call specified that the bonds that will be eligible for the operation will be eight variants which expire between March 25 until June 30th and which include fixed-rate discount bills and CER bonds, as well as a dollar-linked bond that terminates the April 28 and one double in june. At the Ministry of Economy, they said that since it is a voluntary exchange, for those who do not fall within the terms of bond payment will remain unchanged.

The first basket of bonds from which holders can choose comprises three bonds indexed rising prices, with three different maturities: the April 14, 2024 (plus a rate of 3.75%, which represents 30% of the total of this basket), the October 14, 2024 (additional commission of 4% and which represents 40% of the total of this first exchange option) and February 14, 2025 (4.25% interest on the CER, the remaining 30%).

The alternative will be a menu with the bono “double” which was discussed by the opposition, as they considered it a kind of “currency insurance” with an option to sell to the Central Bank. 30% of the second basket will be made up of the “dual” which will expire in February 2024. the rest will be inflation-indexed (also for October 14, 2024 there February 14, 2025).

An exchange of this nature, they believe, will reconfigure the proportion that each variety has in the universe of peso liabilities. The relevance of inflation-linked debt will increase, which is not recommended by the International Monetary Fund, and that which follows the value of the exchange rate should decrease. Of the conversion that will take place on Thursday, just over 80% will be with the CER index and less than 20% with double protection against the rise in prices and the dollar.

For Santiago Lopez Alfaroof Delphos Investment, “banks are likely to choose the integrated basket only for CER bondsI think it will be a good exchange. It’s good news that it’s done to roll to remove uncertainty. The vast majority will be adjusted by the CER, the ‘dual’ is only 30% of one of the baskets, it is a small proportion”, he mentioned before GlobeLiveMedia.

A topic of discussion with the opposition was the put option (put) so that bondholders can sell their position in peso securities to the Central Bank. The mechanism was launched last July and will remain in force for banks wishing to acquire this financial derivative which protects them for have cash when they need it. Ensemble’s objection to the change was that this option involves some sort of “daily maturity” of debt.

In the economic team, they discuss this argument and they don’t see that there is a rational economic logic why a bank suddenly gets rid of all its assets (since it cannot use it, for example, to buy dollars due to exchange restrictions), but they admit that there has been some kind of “Political Risk” where local financing dynamics are determined by the expectation of what another administration can possibly do with local currency obligations.

“This instrument has been offered to banks seeking to develop the capital market which needs a liquid and deep government securities market. The BCRA operates in the securities market, avoiding its volatility and that of the interest rate, and it has demonstrated this in its actions in open market operations. However, its credibility must be built with this type of instrument. Puts sold so far have barely been executed possibly only to verify the operability of the system since they have a cost”, explained sources of the entity which presides Miguel Pesce.

The universe of securities taken into consideration for the exchange totals, according to official dispatches, more than 7 trillion pesosalmost half of which are in private hands and the rest in the public sector investment portfolio.

Beyond the discount that intrastate holders will participate and agree to the exchange, among the officials who worked on the proposal, they consider that the operation could be considered successful if they could reach a percentage of acceptance among banks between 45 and 50%a number they deem reasonable.

Work to reach an agreement with these two sectors, some of which hold the most Treasury peso securities in their portfolios, had begun a few weeks ago from the Ministry of Finance led by Edward Setty.

Also present at the meeting, which ended around 1:30 p.m., Deputy Minister of Economy Gabriel Rubinstein and the senior adviser Leonard Madcur. On behalf of the Central Bank, the President of the Central Bank Miguel Pescethe vice of this institution Lysander Cleri and the general manager Augustin Torcassi.

On the part of the banks participated Claudio CesarioPresident of the Association of Banks of Argentina (ABA), Javier Bolzicothe Association of Argentine Banks (Adeba), Gustavo Manriquez (Bank Macro), Leticia Canclini (Santa Fe Bank), Fabien Kon (Galicia), Alexandre Butti (Santander), Martin Zarich (BBVA), Oswaldo Parre dos Santos (Patagonia), Alexandre Ledesma (ICCB), Federico Mayor Bessia (HSBC), carlos heller (Credicoop), and Claude Canepa (Bank San Juan).

A report by Invecq underlined, in this sense, that February had ended with a to roll (percentage coverage of maturities) of 139% against payment obligations that remained on schedule after the first exchange in January. This means he has almost 40 pesos for 100 which expired in the second month of the year, implying a $405,000 million to finance the budget deficit and thus avoid the Central Bank having to issue pesos to help the Treasury.

The issue of interest rates was also special in February. In November, peso debt placements had reached a maximum rate cap when Finance granted a letter of discount, which configures the main peso financing instrument beyond indexed, at an effective annual rate of 118 percent. In December and January, interest was reduced to 114% there 112%respectively, although in February this streak was interrupted and moved up to 119% annual.

The “walls” of deadlines for the coming months amount to more than 12 trillion pesos between March and July and amounting to 16 billion until October. According to an estimate made by the consultant Equilibra, “if we look at the dynamic maturity profile (projection of the evolution of the CER and the exchange rate until the maturity of each instrument) more than 16 trillion pesos must to be paid (10% of GDP) between March and October,” they estimated.

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