It seems to be a lose-lose situation for Argentine bondholders. In a report entitled "Argentina Debt Restructuring Scenario," issued by Fitch last week, sovereign analysts said Argentine bondholders are looking at deep net present value (NPV) losses as a result of a probable debt restructuring. And even if the restructuring does not occur, the severe walloping that the country's sovereign debt rating has taken this year is sure to deliver a harsh blow to Latin American investors.

Earlier this month, Fitch downgraded Argentina to triple-C-minus with a negative outlook, citing government delays in transferring tax revenues to the provinces, an economic recession, and rising interest rates as just some of the culprits.

Argentina has completed three sovereign debt swaps this year, though none of them have been considered defaults. "We didn't define any of them as a default because they were all voluntary bondholders could make their own decisions about whether it made sense for them and whether it was economically advantageous," said Morgan Harting, a sovereign analyst at Fitch.

More multilateral help ahead?

Given the current situation, "We think it's a real possibility that Argentina will default - that Argentina will restructure its debt and it will not be voluntary," Harting said. "The losses to bondholders could be as much as $26 billion depending on the outcome of any restructuring."

Assuming that Argentina adheres to its zero-deficit policy, the country's debt service burden coming due in 2002 is about $28 billion, and Fitch said at least $10 billion is required in order to finance that debt. "The chances of achieving that zero-deficit budget is going to be challenging," Harting said.

Argentina already secured $3 billion of commitments from the International Monetary Fund (IMF) in September, and rumors abound that both the Inter-American Development Bank (IDB) and the World Bank are looking at providing additional support.

With the $3 billion commitment from the IMF, in conjunction with the cash it has on hand, sources say Argentina should be able to service its debt through next October. "After that, they will have a shortfall and the only way they can make up for that shortfall would be to return to the markets and issue new market debt or to restructure those obligations and try to negotiate and have them coming due later," said Harting.

Investors will lose out

According to Harting, there are reports that the Argentine government is discussing an operation like this for a portion of the debt that is held primarily by domestic investors - essentially banks and pension funds.

Argentina's capital markets are currently closed, which, if they remain closed, poses the question: Will bondholders and other creditors who have obligations coming due next year be able to receive alternative securities on a voluntary basis, or will they be told unilaterally that they must accept different securities of a lesser value? "That would be what we would define as a default," said Harting.

"What's important to note is that Argentina has about $130 billion in outstanding debt," Harting said. "The news about a domestic swap, a domestic exchange, or a domestic restructuring, would only touch on...about $17 billion in principal and could achieve debt service deferments at $1 billion to $2 billion, at most. That would fall far short of what the public needs to raise in order to meet its obligations next year. So really, it could be the first step in a larger, more comprehensive approach to restructuring the debt."

Deals affected

According to Fitch's report, in order for a debt restructuring to work, Argentina would have to reduce its annual debt to between $14 billion and $20 billion in the coming years.

Fitch currently has a triple-C-minus rating with a negative outlook on all bond issues in Argentina. However, last week the rating agency downgraded several Argentine structured transactions, including: Aguas Argentina, Ednor Gain Trust, Molinos Rio de la Plata, The Province of Mendoza, The Province of Santiago del Estero, The Province of Tucuman, The Province of Tierra del Fuego, TGN IFC, Transportadora Gas del Sur S.A., YPF, and TGN CRIBs Financial Trust I. Fitch has also placed additional structured transactions on rating watch negative, including: Salta Hydrocarbon Royalty Trust, BHN III Mortgage Trust, BHN IV Mortgage Trust, and BACS I Mortgage Trust on rating watch negative.

Separately, Moody's Investors Service said after it lowered Argentina's long-term foreign currency rating to Caa3 from Caa1, BHN IV Mortgage Trust, Series 2000-1 and BACS I Mortgage Trust will remain on review for a possible downgrade.

"Restructuring the debt is only a short-term solution to Argentina's long-term creditworthiness," Harting said. "They need to make some significant structural economic adjustments to return to the path of economic growth."

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