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Featuring: Argentina | Lebanon | Ukraine

Our latest thoughts on Argentina’s debt restructuring, Lebanon’s approach to its upcoming Eurobond payment, and the impact of a government reshuffle in Ukraine.

Argentina debt restructuring process set to accelerate in the coming weeks

Market Event: Following recent consultations with bondholders and hiring of financial advisors (Lazard) and agents (BAML/HSBC), the Argentine government will aim to launch its debt restructuring offer within the next two weeks as per their self-designated timeline albeit may be delayed marginally. The market will likely focus on the terms as well as dialogue with investors during the roadshow of the offer through the end of the month and beyond.

Gramercy View: While Argentina’s timeline for completion of the restructuring by the end of March is extremely ambitious and will be challenging to achieve in our view, we believe the government and its advisors will try their best to deliver on the original plan in the near-term. As a result, we deem it critical that the initial offer seeks to incorporate bondholders feedback and coincides with some degree of certainty on future IMF relations or maturities. Otherwise, it will be difficult for many bondholders to accept absent very favorable terms and recovery values. We do expect the authorities to maintain an open and constant dialogue with the Fund throughout bondholder negotiations, including completion of an Article IV review, which could ultimately lead to a deal albeit too early to determine. As talks with investors progress into the second quarter, the prospects for default grow, depending on the tone of the negotiations as well as broader macroeconomic conditions and liquidity. As previously outlined, we believe that incentives remain aligned for an ultimate deal with recovery levels comfortably above current prices, but ample deal risk, and a tight and rushed timeframe could result in price volatility before a restructuring is eventually complete. On a separate but related note, volatility and delay may also ensue in the case of further spread of the coronavirus domestically. While Argentina has a relatively robust healthcare system to cope with such a crisis, the fragility of the broader macroeconomic and political situation leaves the economy vulnerable to further erosion of confidence as well as weaker external demand.

Lebanon inches closer to default 

Market Event: Lebanon faces an upcoming Eurobond maturity of $1.2 billion on March 9th. The government has announced that it plans to meet this Saturday, March 7th, to finalize a plan for the maturity. The administration had previously indicated that it intends to utilize a seven day grace period. At the same time, there have been reports that the government may attempt to force local banks to buy back enough of the bonds from foreign holders to obtain a 75% share needed to amend the bond terms.

Gramercy View: We do not think that the government will make the upcoming payment given the social repercussions and impending liquidity pressures. Major holders are unlikely to sell their positions back to local banks at current market prices and banks have limited funds to pay a premium for the bonds to incentivize a sale. The seven day grace period is likely too short a timeframe to develop a holistic restructuring strategy and proposal but may yield an attempt at a short term muddle through approach. While consultation with the IMF, as well as hiring of a financial advisor (Lazard) is a step in the right direction towards a solution, a comprehensive restructuring deal is unlikely to be imminent. We expect further entrenchment of the crisis on the back of a failed short term strategy or political challenges which continue to generate price volatility. Thereafter, the dire state of nature could provide the necessary incentives domestically and internationally for a constructive outcome which encompasses multilateral and bilateral support.

Ukraine government reshuffle to slow IMF negotiations over a new program

Market Event: On March 4th, parliament approved the appointment of a new Prime Minister (PM), Denys Shmygal, replacing former PM Oleksiy Honcharuk. Previous Finance Minister Oksana Markarova was replaced by Ihor Umansky, a former acting finance minister under Yulia Tymoshenko. Additional appointments and changes may be forthcoming. The country’s Eurobond prices have fallen roughly five points since the announcement.

Gramercy View: We believe that these changes could further delay the agreed, but unapproved, new three year $5.5 billion arrangement under the Extended Fund Facility (EFF). Failure to pass key banking and land reform laws would challenge IMF program approval. While initial comments from the PM aimed to provide reassurance of policy continuity and directionality, new MinFin Umansky has been vocally critical of the IMF in the past and his announced pensions increase, combined with intent to support industrial and agriculture sectors could be early signs of a less prudent fiscal stance over time. The changes also come amid a decline in Zelensky’s popularity to 47% versus 74% at the start of his term last April, which suggests he has diminishing flexibility to execute on reforms. Lastly, the coronavirus, while not uniquely threatening to Ukraine, will weigh on growth and sentiment given its increased linkages to Europe. Given the aforementioned fundamental factors combined with heavy positioning, we anticipate further pressure on bond prices in the near term. Potential for recovery over the medium term will depend on the status of the IMF program and if the reform agenda remains at least partially intact.

Please contact our Co-Heads of Sovereign Research with any questions:

Kathryn Exum, Senior Vice President, Sovereign Research Analyst
[email protected]

Petar Atanasov, Senior Vice President, Sovereign Research Analyst
[email protected]

This document is for informational purposes only. The information presented is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Gramercy may have current investment positions in the securities or sovereigns mentioned above. The information and opinions contained in this paper are as of the date of initial publication, derived from proprietary and nonproprietary sources deemed by Gramercy to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. You should not rely on this presentation as the basis upon which to make an investment decision. Investment involves risk. There can be no assurance that investment objectives will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.