Cablegate: Argentina: Unlikely to Achieve Aim of 2009 Holdout Deal

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R 242212Z NOV 09
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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001286

SENSITIVE
SIPDIS
SIPDIS
TREASURY FOR WLINDQUIST, SAO PAULO FOR WBLOCK

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD AR
SUBJECT: Argentina: Unlikely to Achieve Aim of 2009 Holdout Deal

REF: BUENOS AIRES 1198; BUENOS AIRES 1161

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Summary

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1. (SBU) A key Argentine Ministry of Economy official explained
that the GOA hopes to launch its offer to the holdouts from the
2005 debt restructuring deal by December 15, in order to
accommodate the desire of many institutional investors to clear the
defaulted Argentine debt from their books before the end of the
year. While all involved are working hard to make this happen, it
is unlikely, as time is short and much work remains to be done
vis-????-vis the securities regulatory authorities in numerous
countries. When finally proposed, the deal is likely to have a net
present value (NPV) of anywhere between 52 cents to the dollar of
bonds held to 28 cents, depending on which of the components now
being studied by the GOA make it into the final offer. The GOA
will interpret even an offer on the high end of this range as
fulfilling the legal requirement that the new offer be worse than
the earlier 2005 offer, since it would pay for some elements of it
by issuing a new bond, rather than with cash, as in the 2005 deal.
End Summary.

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GOA Moving on Holdouts Offer

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2. (U) On November 18, Deputy EconCouns met with Norberto Lopez
Isnardi (LI), the Director of the Office of Public Credit in the
Ministry of Economy, the chief officer responsible for the
technical aspects of the reopening of the 2005 debt restructuring
deal to reach an agreement with the holdouts. LI described the
steps in the process as follows. After a debate, the Congress
approved the suspension of the Bolt Law ("Ley Cerrojo") on November
18. This triggered a number of events which will ultimately lead
to the launching of a formal exchange offer to the holdouts.
First, the suspension of the Bolt Law needs to officially become
law with the President's signature and publication in the Official
Gazette. This generally takes about 10 working days. Second, the
President will have to sign a decree allowing the GOA to issue
bonds under foreign-country law, which will be one aspect of the
exchange transaction.

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SEC Approval Key

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3. (SBU) Third, the GOA must hire an Exchange Agent to be

BUENOS AIR 00001286 002 OF 004

responsible for all of the complicated logistics involved in the
implementation of the exchange. In the 2005 debt restructuring,
the Bank of New York was the agent. Currently, the GOA is working
to hire this bank again. Fourth, it is necessary to complete the
approval processes of all of the different regulatory agencies in
the various countries in which investors will be involved. The
GOA's intention is to launch the transaction globally -- in all of
the countries at the same time. This may be difficult to do given
that some of the regulatory agencies may take different amounts of
time to approve the required paperwork. LI noted, however, that
once the U.S. Security and Exchange Commission (SEC) clears the
documentation, other regulatory agencies around the world are
likely to approve shortly thereafter, as happened in the 2005 debt
restructuring process.

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Much Paperwork Remains

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4. (U) The GOA has already filed an 18K at the SEC but it still
needs to file the Prospectus Supplement of the offer, which
includes all the mechanics and implementation issues involved in
the transaction. The three banks working on the agreement on
behalf of the GOA (Barclays, Citi, and Deutsche) need to file a
document called the "Dealer Management Agreement," which is still
in the works. The GOA is working to file the equivalent of the 18K
in Japan during the week of November 23. It still needs to file
the requisite paperwork submission for the EU in Luxemburg, where
it will file the equivalent of the 18K for Europe plus the
Prospectus Supplement. The filing in Luxemburg should cover all of
Europe. However, it is unclear if Italy will accept the Luxembourg
submission or will require a separate filing.

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Institutional Investors Want a 2009 Deal

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5. (U) According to LI, the SEC requires a maximum of thirty days
to review and comment on the Prospectus Supplement. However, it
may take as little as two weeks, which would still enable the GOA
to launch the offer before its December 15 target date. If the
approval process goes beyond December 15, it will likely not be
possible to launch an offer in 2009, as the holiday season around
the world and the summer travel season in Argentina would be too
close. LI acknowledged that it may be too ambitious to expect an
offer to be launched by December 15. However, he did not dismiss
the possibility, saying that the institutional investors who are
willing to participate would prefer to have the offer launched and
settled before the end of the year to avoid, if possible, carrying
an open position in GOA defaulted debt into the new year. The GOA
would also like as much of the deal as possible to happen during
the current year.

BUENOS AIR 00001286 003 OF 004

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GOA Encouraging Retail Investor Participation

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6. (U) Without getting into specific details of the offer, LI
alluded to some issues currently being analyzed by the GOA. One is
the possibility of an early submission period before the end of the
year of about a week to accommodate the preference of institutional
investors to settle the transaction prior to the end of the year.
Retail investors would also be allowed to participate during this
period. However, the GOA believes that retail investors will
prefer to participate over the course of a normal submission
period, which could last for about five weeks. Having two
submission periods would accommodate the needs of both types of
investors, and - the GOA hopes - increase the overall participation
rate. In a further effort to encourage the participation of retail
investors, the GOA is studying the possibility of issuing a
shorter-maturity but lower coupon bond as part of the deal. LI
stressed that the GOA considers it very important that there be
high retail investor participation and is putting a good deal of
effort into tailoring the proposal to be more attractive to this
group of bondholders.

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Components of Deal Still Unclear

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7. (SBU) LI said that the GOA is considering making an offer
composed of four possible components - an equivalent to the
long-maturity discount bond issued in the 2005 restructuring; a new
shorter-maturity bond with a relatively low interest rate; past due
interest -PDI-to be paid for by the issuance of new bonds; and a
GDP warrant. However, it is not clear if all of these pieces will
make it into the final offer. Depending on which elements are
finally included, the worth of the offer comes in at a net present
value (NPV) somewhere between 52 cents to a dollar of original
principle at present market prices with all of the components
included to 28 cents, when excluding PDI and a GDP warrant. A NPV
of 52 cents would obviously be better for investors in present
value terms compared to the original 2005 offer. However, LI
argued that the GOA could still interpret the offer as fulfilling
the legal requirement that it be worse than the 2005 offer, since,
from its point-of-view, the GOA would pay PDI and dividends on the
GDP warrants with a bond rather than with cash. Investors who
participate in the 2005 exchange would therefore have no incentive
to resubmit their bonds to participate in the new exchange. As for
the interest rate the GOA will have to pay on the new bonds to be
issued in return for the new cash put up by the investors in the
transaction, LI acknowledged that Economy Minister Boudou's
previously-expressed desire that the yield reach the single-digit
level is unlikely to be fulfilled.

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Difficult to Know Who Holds What

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8. (U) Although noting that it is impossible to know for sure, LI
said that of the $20 billion face value in bonds controlled by the
holdouts, the GOA estimates that about 40% ($8 billion) is held by
retail investors and 60% ($12 billion) by institutional investors.
According to LI, institutional investors who control about $8-9
billion have already committed to the three banks handling the
transaction to participate. Those -- mainly vulture funds --
looking to the courts for a solution account for about $3-3.5
billion. LI noted, however, that it is very difficult to
accurately estimate the sums held by the different classes of
investors, since Italian investors, who have filed claims at the
International Center for the Settlement of Investment Disputes
(ICSID) do not need to prove ownership before filing ICSID claims.
Consequently, the value of the claims ultimately filed by Italian
investors in the proposed restructuring - when they do have to
prove ownership very clearly -- may be considerably lower than the
amount they filed for in ICSID claims. Also, the value of the
bonds controlled by retail investors is also unclear, since many of
the original retail investors are assumed to have sold most, if not
all, of their holdings.
MARTINEZ

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