Cracks are starting to appear as Javier Milei removes the distortions that once characterised Argentina’s economy, hurting companies that bulked up on debt by exploiting exchange rate gaps.
The President in the past 16-plus months implemented sweeping changes, enforcing cuts to public works and generous subsidies for utilities. He most recently removed the currency controls that governed the peso for years.
Companies took advantage of the currency controls that created a gap in exchange rates by importing goods at the stronger official rate and selling them in pesos linked to a weaker parallel rate. Companies were also able to borrow in the local capital markets, benefitting from investors looking to hedge against currency risks and rushing to buy securities linked to the official exchange rate, such as bonds or commercial paper.
Following those recent overhauls however, companies are beginning to stumble, with two subsidiaries of utility Albanesi SA on Monday unable to pay US$19.5 million in interest on a bond that was issued just six months ago. Then, on Wednesday, pulp and maker Celulosa Argentina SA said it will fail to meet a payment on its dollar bonds. The defaults add to a list that’s expected to get longer as Milei pursues his dramatic shift of the Argentine economy.
“Albanesi had been struggling with debt for three years and, when Milei came to power, companies had to start paying higher interest rates, more in line with international rates,” said Martín Arancet, an analyst at Balanz Capital in Buenos Aires.
Agro-industrial companies Grupo Los Grobo LLC, Agrofina and agricultural supplier Red Surcos SA in recent months also failed to meet their debt obligations. Red Surcos, for one, in December defaulted on the payment of two promissory notes. Los Grobo and Agrofina accumulated claims for non-payment of debts of around US$300 million, according to local news reports.
The defaults aren’t systemic, nor are they concentrated in a single sector. Still, they’re highlighting the growing pain points for companies in Milei’s Argentina.
For Albanesi, the biggest issue was Milei’s reduction in public spending, leading to interruptions in payment flows from the state-owned electricity market operator Cammesa to energy producers. The company settled its overdue debts through a principal write-off without recognition of interest, forcing it to seek new financing as it was already highly leveraged and had several projects underway. The company in essence accumulated debt to pay down debt.
Los Grobo, Agrofina and Red Surcos were hit hard when Milei decided to normalise the exchange rate by adopting a de-facto fixed exchange rate. The exchange rate gap narrowed sharply and expectations of a devaluation faded. Now, Milei’s Central Bank lets the currency float freely between roughly 1,000 to 1,400 pesos per dollar before intervening.
Albanesi, Agrofina, Los Grobo and Red Surcos declined to comment.
Celulosa on Wednesday said it hired VALO Columbus to restructure its debt, according to a statement. It blamed its difficulties on the recent changes in the peso, a drop in domestic sales and the government’s delay in negotiations with the International Monetary Fund.
“While inflation was very high, the exchange rate gap was wide and the market was very closed, there was a lot of demand for hedging, and many companies had high operating results,” said Gabriela Catri, a ratings manager at Moody’s.
by Ignacio Olivera Doll, Bloomberg
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