Conditions for the exchange of debt in default

Decree No 1735/2004 includes the conditions for the offer of the restructuring of the public debt whose payment has been continuously deferred by the laws approving the budgets of 2002, 2003, 2004 and 2005.Such laws deferred payments of the service of the public debt incurred before December 31, 2001 until the end of the restructuring process.

The decree contains the following six annexes: (i) Prospectus Supplement for the international offer; (ii) operative procedures for the exchange applicable in Argentina; (iii) conditions applicable to the new bonds offered in the exchange; (iv) financial conditions of the“Republic of Argentina International Bonds” and the “Republic of Argentina Bonds”; (v) financial conditions of the GDP-Linked Securities (“Valores Negociables Vinculados al PBI”); and (vi) the Trust Indenture.

The conditions set forth in Decree No 1735/2004 follow, in general terms, the guidelines set forth in the Dubai proposal submitted by the Argentine Government in September 2003 and the official press communication by the Ministry of Economy of June 1, 2004, which are referred to in the July 30, 2004 edition of Marval News.

This is the first exchange that will take place since the declaration of default of the public debt established by Decree No 256/2002 and Resolution No 73 of the Ministry of Economy.The previous exchanges were the exchange for Guaranteed Loans (“Préstamos Garantizados”) that took place in December 2001 (through Decrees 1387/2001 and 1646/2001), the so-called “Megacanje” in June 2001 (through Decree 648/2001) and the exchange for the so-called Brady Bonds in March 1992 (Decrees 2321/1992 and 407/1993).

As is usually the case in these type of transactions, the conditions of the offer are not definitive.Article 8 of such decree empowers the Ministry of Economy to modify such conditions and to set forth the final offer, so long as such modifications are not material.

The exchange purports to, among other things, consolidate approximately 180 different classes of bonds (both under Argentine and non-Argentine law) in 11 debt instruments: three in Pesos (Pars, Quasi-Pars, and Discounts), four in USD (Pars subject to Argentine law, Pars subject to New York law, Discounts subject to Argentine law and Discounts subject to New York law), two in Euros (Pars and Discounts) and two in Yens (Pars and Discounts). GDP-Linked Securities will be originally complimentary to such instruments.

1. General conditions of the offer

The offer is authorized for maximum of bonds for face value US$ 41,800,000,000.The new debt instruments that will be issued will be called “Republic of Argentina International Bonds” and the “Republic of Argentina Bonds”, when the applicable law is foreign law and when the applicable law is Argentine law, respectively.In addition, instruments derived from the new debt instruments will be issued, which will be called “GDP-Linked Securities”, for a face value equal to the residual nominal value of the past due interest of the public debt being restructured.

The debt being restructured through the issuance of the “Republic of Argentina International Bonds” and the “Republic of Argentina Bonds” is the principal amount of the debt, which does not include past due interest. Such past due interest will be exchanged for the “GDP-Linked Securities”.

There is no cash payment in the exchange.However, given that interest on the “Republic of Argentina International Bonds” and the “Republic of Argentina Bonds” has begun to accrue since its date of issuance (December 31, 2003), at the time the instruments are delivered to the creditors, they will have accrued, at least two periods of interests, that will be paid in cash to the new holders.

In correlation with the law applicable to each new debt instrument, article 3 of Decree No 1735/2004 establishes the change of venue in favor of the courts of New York, London and Tokyo.Decree No 1735/2004 expressly states that the Argentine Government does not waive its immunity of execution as regards to judgements derived from such change of venue.In addition, as a result of the Argentine Government’s experience after the default, the new waiver clause does not include either diplomatic or military property.

2. “Republic of Argentina International Bonds” and “Republic of Argentina Bonds” Terms and Conditions

The New Securities will be issued in three classes: (i) Par Bonds, (ii) Discount Bonds and (iii) Quasi-Par Bonds.The exchange ratio per unit of the Eligible Securities for the New Securities will be as follows, with the exception of the Brady Par Bonds and the Brady Discount Bonds (whose principal is guaranteed with US Treasury Bonds):

Pars               1.000 (i.e., face value 1 of the New Security per face value 1 of the Eligible Security)
Discounts     0.337 (i.e., face value 0.337 of the New Security per face value 1 of the Eligible Security)
Quasi-Pars   0.699 (i.e., face value 0.669 of the New Security per face value 1 of the Eligible Security)

The maximum aggregate principal amount of Pars will be of US$ 10,000 million if the acceptance pursuant to the offer is less than or equal to 70% and of US$ 15,000 million if the acceptance pursuant to the offer is greater than 70%. The Pars are due on December 31, 2038.

The interest rate to be paid by US$ denominated Pars will step up from 1.33% to 5.25% through its term, the ones denominated in Pesos will go from 0.63% to 2.48%, Euro denominated Pars will increase from 1.20% to 4.74%, and the interest rate of the Yen denominated Pars from 0.24% to 0.94%.All interest rates are fixed, there are no floating rates.

The maximum aggregate principal amount of Pars will be up to face value US$ 27,570 million.Discounts will be due on December 31, 2033.

The interest rate of Discounts will be fixed. USD denominated Discounts will bear an annual interest rate of 8.28%, Peso denominated Discounts of 5.83%, Euro denominated Discounts of 7.82% and Yen denominated Discounts of 4.33%.Part of such interest rates will be capitalized and the rest will not. The portion of the interest that will be capitalized will be reduced overtime.

Pars and Discounts will be denominated in four different currencies: Pesos, USD, Euros and Yens.

There will only be a single class of Quasi-Pars, which will be denominated in Pesos, for a maximum aggregate principal amount of face value 24,800 million Pesos, and will bear a fixed annual interest rate of 3.31%.Quasi-Pars will be due on December 31, 2045.

In order to determine the exchange ratios for Eligible Securities not denominated in USD, their amounts shall be adjusted based on the exchange rates in effect on December 31, 2003.

All Peso denominated New Securities will be adjusted to reflect inflation based on the consumer price adjustment rate (“CER”), created by Decree No 214/2002 (recently ratified by the law approving the national budget for 2005), in accordance with the provisions of Decree No 1733/2004 (see the article “New exception to the prohibition of indexation by CER” on this edition of Marval News).

If the acceptance of Pars and Quasi-Pars exceeds the maximum aggregate principal amount authorized, Discounts will be delivered.

3. “GDP-Linked Securities” Terms and Conditions 

Creditors who accept the offer will receive “GDP-Linked Securities” attached to the New Securities.Such instruments shall have a “notional” amount equal to the corresponding amount of the past interest of the Eligible Securities due before December 31, 2001.GDP-Linked Securities will not release any payments if the performance of Argentina’s GDP does not exceed the values established in the offer.GDP-Linked Securities shall expire no later than December 15, 2035 and their first payment, if it occurs, shall be on December 15, 2006.

The offer establishes an expected performance of Argentina’s GDP that, if exceeded, shall trigger the payments of GDP-Linked Securities.Such payments will be adjusted by a currency rate derived from the currency denomination of each instrument.If these conditions are met, payments shall be on December 15 of each year, in accordance with the GDP of the year due.

GDP-Linked Securities shall have the currency and applicable law of the New Securities to which the GDP-Linked Securities are initially attached. They shall be attached and traded with the underlying New Security for a period of 180 days following the Settlement Date. At the expiry of such period, GDP-Linked Securities shall be eligible to trade independently.