Proposal for the restructuring of Argentina’s defaulted public external indebtedness

On June 1, 2004, Minister of Economy and Production Roberto Lavagna announced in Argentina, through a press release, details of the debt restructuring proposal for the reduction of Argentina’s public external indebtedness. Days later, on June 10 and June 11, a report on the debt restructuring developments was submitted to the United States Securities and Exchange Commission (SEC) and to the local “Comisión Nacional de Valores” (National Securities Commission).

The referred documents follow the guidelines laid down in Dubai at the end of September 2003, based on the sustainability of Argentina’s debt and the regain of the country’s value (“recrear valor”).

Terms of the debt restructuring proposal:

- Principal amount of defaulted debt: US$ 81.2 billion.

- Reduction of principal under nominal terms: 75%, that is, US$ 60.9 billion.

- Types of bonds to be issued: the debt restructuring will be carried on by the issue of three types of bonds: par bonds, quasi-par bonds and discount bonds.

Par bonds will have a maturity of 35 years with a growing interest rate rising from 1.35% to 5.25%. Amortization will be in two equal semi-annual payments from year 25 of issue day. If acceptance of the proposal exceeds 70%, initial interest rates will raise from 1.35% to 2.08% for years 1 to 5.

Quasi-par bonds will be issued in pesos under a convertibility ratio of AR$ 1.4 every US$ 1 plus the Coeficiente de Estabilización de Referencia CER (Reference Stabilization Ratio), therefore suffering a reduction of 30.6% if acceptance is equal to or less than 70% and of 29.5% if acceptance exceeds that percentage. They will have a maturity of 42 years with equal semi-annual installments from year 32. The interest rate will depend on the percentage of acceptance of the offer. The interest rate will be of 5.57% if acceptance is equal to or less than 70%, and of 5.96% if acceptance exceeds 70%. In both scenarios interest will capitalize until year 10.

Discount bonds will have a maturity of 30 years with semi-annual installments from year 20. The face value reduction will be of 66% over the principal, if the acceptance of the offer implies an amount equal to or less than 70% of defaulted obligations and of 63% if the positive answer of bondholders exceeds 70%. Interest rates will vary depending on the percentage of acceptance of the offer. If acceptance is equal to or less than 70% there will be an effective interest of 3.97% in the first 5 years and a capitalized interest in the same term of 4.35%. If acceptance exceeds 70% those rates will range from 4.15% to 4.36%. Then, in both cases, they will grow in a progressive way.

Additionally a GDP-linked unit will raise payments under the bonds annually as from 2006. Payments will depend on the GDP growing more than 3% in the year before calculation date, that is on November 1 every year as from 2006. Payment date will be on December 15 every year. Payment amount will be of 5% of excess gross domestic product (GDP) (the difference between actual GDP and projected GDP –expressed in current pesos- as the reference date) divided by the average free market exchanging rate of pesos per US dollar, euro or yen, during the 15 days preceding the payment date.

Financial terms of the issue will depend on two different scenarios:

- If bondholders’ acceptance of the proposal is equal to or less than 70% then the aggregate amount of new debt securities to be issued will be approximately US$ 38.5 billion. In this case, the maximum principal amount of the par bonds to be issued will be approximately US$ 10 billion and the maximum principal amount of Discount Bonds will be approximately US$ 20.17 billion.

- If bondholders’ acceptance of the debt proposal exceeds 70% then the aggregate amount of new debt securities to be issued will be approximately US$ 43.2 billion. In this case, the maximum principal amount of the par bonds to be issued will be increased from US$ 10 billion to approximately US$ 15 billion and the maximum principal amount of discount bonds will be reduced from US$ 20.17 billion to approximately US$ 19.87 billion.

In either scenario, the maximum principal amount of quasi-par bonds will be approximately US$ 8.33 billion.

The new debt securities issued by the country will contain collective action clauses which authorize the Government to seal the renegotiation with the support of a majority of bondholders and not necessarily all of them.

New debt securities will not be issued in respect of past-due interest. For purposes of the restructuring, past-due interest will be taken into account solely for purposes of defining the maximum principal amounts of par bonds, quasi-par bonds and discount bonds to be issued.

Although the proposal was described as final, possible adjustments are expected upon dialogue with bondholders.

On July 14, representatives of foreign bondholders announced in a press release in New York their disapproval of the Argentine proposal, presented an alternative that contemplates a maximum reduction of 45% and indicated that they are looking forward to negotiating with the Argentine government.