Plan B for Kicillof: a bridging loan to avoid default

Buenos Aires Province Governor Axel Kicillof has a Plan B for his debt quandary – some investment funds and banks have offered assistance, should the 75 percent of creditors needed to postpone the province’s capital payments of US$250 million on the BP 21 bond until May 1 not materialise.

According to market sources consulted by Perfil, that option consists of granting the province a bridging loan so that it can avoid default and a domino effect among other provinces with financial problems also clamouring for help without recourse to national aid.

The provincial government is still shooting for the 75 percent threshold – although the markets do not see any “incentives” for creditor acceptance.

Nery Persichini, of GMa Capital, said that in order to secure 75 percent agreement Buenos Aires Province “would have to give some indication of a plan, something conspicuous for its absence until now, and/or the outline of some new proposal which could serve as a “sweetener.” (Something that arrived this week when officials said investors would be paid interest on the three-month delay.)

Diego Martínez Burzaco, of MB Inversiones, agrees: “No incentive for bondholders accepting the postponement of payment without any kind of plan is to be observed nor is there any certainty that the Province will pay up in May.”

The great unknown factor is what steps to follow if agreement is not obtained.

According to the analysts, the strategy on both sides is brinkmanship but they also warn that the collateral effects of a default would not suit either the provincial or the national governments, since it would complicate debt restructuring, nor the creditors since the price of their bonds would fall yet further.

“To suspend payments for such a small sum would be the stupidest default in the universe,” reasoned one leading authority in the financial system.

Paula Gandara, of Adcap, highlights: “We understand that various investment funds have offered the Province bridging loans permitting payment [of the US$250 million to be shared].” She does not believe that “default will happen because it does not suit anybody” but also thinks that there must be “a Plan B but nobody is saying so for strategic reasons.”

Nicolás Chiesa, the director of PPI, agrees that “it would be really weird to withhold payment and complicate the restructuring of sovereign debt because the sum is small, both sides are taking the tug-of-war to the limit but at some poi nt there will be an agree - ment.”

For the fin a n c i e r Chr istia n Buteler “it wou ld b e strange for the Pro - vince to go down over a small sum when options for payment exist, they could borrow from Bapro (the provincial bank) or go out to the market placing debt in pesos as both the national and Chaco provincial government have done – these decisions carry their political cost but a default would be costlier.”

A round billion is the sum of dollars mentioned by the market to ease the pressure.

In the view of Miguel Zielonka of Econviews, “what the province is doing is a negotiating strategy because it can find US$250 million independently of national aid” although he sees as “the most probable scenario that the Province will not pay but neither will be the bondholders trigger the clause to accel e r a t e pay - ments.”

‘SPECIAL FUND’

In this context, market sources and the national Cabinet itself have mentioned that one of the options on which they are working with “great care” is the formation of a group of banks to operate jointly with Bapro. The objective is a “special fund” to attend at least this year’s payments and give Kicillof some breathing-space.

The sources assure that with this special fund, whose sum has yet to be defined but should top US$1 billion, Buenos Aires Province will gain time in its negotiations with creditors.

But Bapro sources rule out any loan option: “The Province continues working at the negotiation with the creditors” with February 5 now the outside date for paying the US$ 250 million.

Chiesa warns that default would also have an impact on the national debt negotiations. After the decision to kick payment forward, “both provincial and sovereign debt plunged.

Today the bonds are trading at levels of 42-45 percent and the big problem is that if the Province declares itself in default and the bonds fall into the region of 30 percent, that could make the mutual funds feel obliged to sell off their Argentine position which would then be bought by the vulture funds, with whom the government does not like to deal because the negotiation is much tougher with lawyers who go all the way.”