The Restructuring Review - Argentina

Author:Mr Ricardo Beller and Martin Campbell
Profession:Marval O'Farrell & Mairal
 
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  1. OVERVIEW OF RECENT RESTRUCTURING AND INSOLVENCY ACTIVITY

    i. Liquidity and state of the financial markets

    The international financial markets have not been accessible to either the private or public sector of Argentina since the second half of 2007. During this period Argentina faced its own financial restrictions, to which it later added the international financial turmoil that resulted from the subprime crisis and the fall of leading financial institutions such as Bear Stearns and Lehman Brothers, among others, and more recently the European crisis.

    Despite the difficulty of accessing the international financial markets, Argentina has almost completely restructured its defaulted sovereign debt. In June 2010 the Argentine government closed a successful second debt restructuring exchange of its bonds in default. The first exchange offer had been made in 2005, and had been accepted by approximately 76 per cent of the holders of the bonds in default at that time. The aggregate amount of debt restructured in this second exchange was US$18.3 billion. The second exchange was accepted by approximately 70 per cent of the remaining holdouts. Adding the results of the first and second exchange, approximately 92 per cent of the sovereign debt in default has been restructured. The bonds that were not exchanged represent approximately US$5.5 billion, and are held mostly by distress funds, most of which have filed judicial claims against Argentina.

    ii. Inflation, slowing down of the economy and exchange control restrictions1

    2011 ended on a high note for the Argentine government. GDP grew by 8.9 per cent and Cristina Fernandez de Kirchner was re-elected president by an overwhelming majority of 54 per cent with no significant political opposition; in 2012, however, the situation is not so favourable. Argentina is facing a significant increase in inflation, combined with a slowing down of economic activity: economists refer to this phenomenon as 'stagflation'.

    Annual inflation sat at 10.9 per cent in 2006, 8.8 per cent in 2007, 8.6 per cent in 2008, 6.3 per cent in 2009 and 10.8 per cent in 2010.2 In 2011 it increased significantly to 22 per cent per annum, and is projected to reach 25 per cent per annum in 2012.3 GDP, on the other hand, is estimated to grow by 2.2 per cent per annum in 2012,4 which is a significant decrease compared with the growth of previous years: 8.5 per cent in 2006, 8.7 per cent in 2007, 6.8 per cent in 2008, 0.9 per cent in 2009 (a low year due to the 2008 financial crisis in the United States and Europe), 9.2 per cent in 2010 and 8.9 per cent in 2011.5

    The inflation has not been accompanied by a proportional devaluation of the Argentine peso, which is relatively overvalued with respect to other currencies. As a result, Argentina is losing competitiveness in its exports, which are relatively more expensive, and is seeing higher demand of imported products and foreign currencies, which are cheaper.

    To deter capital flight during 2012 the Argentine government has significantly increased foreign exchange controls. Transfers of funds from Argentina to foreign countries has been increasingly restricted, as has access to exchange pesos for foreign currencies in the official market. This has led to a significant volume of foreign exchange transactions being carried out in the informal market, with a higher difference between the official and the informal exchange rates. As of 30 June 2012 the exchange rate of the informal dollar, locally known as the 'blue' dollar, was approximately US$1 to six pesos, while the official exchange rate was of US$1 to 4.5 pesos.

    iii. Greater intervention of the Argentine government in the economy

    Increasing intervention of the Argentine government in the economy is decreasing the level of investments being made in the country and increasing capital flight.

    Most notably, in May 2012 the government expropriated 51 per cent of the shares of YPF Sociedad Anónima and 51 per cent of the shares of YPF GAS SA. The expropriation process of the controlling stake of these companies owned by Repsol, a Spanish oil and gas company, was initiated in April 2012 by a presidential decree by which the boards of directors of these companies were removed and replaced by two government interveners. The grounds for expropriation alleged by the government were the low level of investments of the company and the resulting decrease of oil and gas reserves. Several claims have been filed by Repsol against the Argentine Republic, which are currently pending resolution.

    A prior event that had a negative impact on investments was the expropriation of Argentine pension funds ('the AFJPs'). In November 2008 the Argentine government took over the securities held by these, most of which consisted of equity and debt instruments of Argentine private companies, as well as government bonds. The AFJPs were key players in the Argentine capital markets until then. Their disappearance had a severe negative impact on the local markets, which currently do not offer a relevant source of financing to Argentine companies.

    iv. Impact of specific regional and global events

    Argentina's access to international financial markets has been restricted since the crisis of 2001, in which Argentina declared the default of its sovereign debt. Argentina has relied on significant trade surpluses, taxes on exports and accumulation of international reserves to overcome these restrictions.

    The subprime market crisis in the US and the recent European crisis have not significantly affected some of Argentina's main trading partners, such as Brazil and China, whose economies continue to grow and have a demand for Argentinian products. These crises have therefore not had a significant effect on the Argentinian economy.

    Argentinian private-sector companies have also had limited access to financing in recent years. However, significant consumer demand in the local market plus exports to other countries that demand their products have allowed most of them to finance their activities.

    v. Market trends in restructuring procedures and techniques employed during this period

    There have been two trends in recent years that may be mentioned: there has been a greater involvement and intervention of the Argentinian government in the event of insolvency of a company that provides public services; and several bankrupt companies were taken over by workers, who continued to operate them after bankruptcy.

    Greater government intervention

    In December 2008 Transportadora de Gas del Norte SA ('TGN'), one of the two companies that provide gas transportation services in Argentina, announced the deferral of the payment of principal and interest of its debt represented by certain type of bonds denominated 'negotiable obligations'. TGN also announced that it would prepare a plan to be proposed to its creditors for restructuring its financial debts. As a consequence, on 29 December 2008, the Argentinian Regulatory Agency for the Regulation of Gas ('ENARGAS') appointed an officer to act as an auditor and perform the 'co-administration' of the company for 120 days, alleging that the provision of the public service of gas transportation was being put at risk as TGN was in default. The governmental intervention in TGN was further extended through different resolutions of ENARGAS and the government was still intervening in TGN in 2011. After the default, TGN did make an offer to its creditors holding bonds that had an important consent from the holders. However, since TGN's cash flow has not improved due to the decision of the government to avoid increasing the tariffs for transportation of gas, TGN decided to withdraw its offer and filed for a judicial restructuring proceeding (concurso preventivo). Due to procedural reasons, the judge hearing this petition decided not to open the process, and as a consequence TGN appealed such order. The Court of Appeals resolved that TGN is precluded from restructuring its debt by means of...

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