Moody's. The risk of private default grows due to an official regulation

In Argentina, they have stopped talking about default at the sovereign level, but are now talking about default at the corporate level. The new exchange restrictions force indebted companies with capital maturities of at least US $1 million a month to either refinance 60% of the amount or use their own dollars for the payment. According to one of the largest global rating agencies, this regulation exposes companies to greater risk of default.

A report prepared by Moody's estimates that Communication "A" 7106, which restricts indebted companies’ access to the official dollar market in order to cancel their obligations, "will have a negative impact on the companies' ability to pay on time and form local companies". For the financial firm, negotiable obligations (corporate bonds) with capital maturities between October 15, 2020 and March 31, 2021 (the period in which, in principle, this limitation applies) total US $1,253 million.

According to the Moody's report, YPF has maturities of more than US $400 million. Banco Hipotecario, which had already initiated a restructuring prior to the communication, has raised more than US $250 million, and IRSA, more than US $150 million. The rating agency estimates that companies could repay their debts by buying financial dollars, but that would force them to have to acquire 100% of the amount and not just 60% (because otherwise, access to the official for the remaining 40% would leave them out of that possibility). At this time, the difference between the official wholesale exchange rate and the cash settlement rate is around 90%.

If they choose to restructure the 60% requested by the Central Bank, companies with maturities before December 31 must present their plans to the monetary authority before the end of this month, that is, in less than a week. They won't have it easy, warns Lorena Reich, director of the LatAm region for Lucror Analytics. They face institutional investors who, while aware of the risks of investing in local notes, were not expecting that after the restructuring of sovereign debt, the country risk would continue to rise (today it exceeded 1,400 points) and the new bonds would fall so much.

"Moreover, in the global market, there is risk-off, the concern about the international economy, and the second wave of COVID-19 . In general, there is a propensity for investors to reduce risk, and that could further complicate the investors' appetite to refinance local companies," warns the specialist.

In the same vein, Jimena Vega Olmos, a partner of the law firm MHR Abogados, explains that the current situation "makes it difficult and expensive to refinance or get new financing in the very short term given by the BCRA." He adds: "All this is very complicated, and exposes companies to the risk of default or having to bear a very high cost." The situation is complex, the deadline is short, and the restriction caught everyone by surprise, "because even in the most restrictive period of the 2012-2015 stocks, the payment of financial debts abroad had not been affected," says the lawyer.

Meanwhile, more than 10 companies, including Newsan, Genneia and Cresud, have sent notices to the National Securities Commission (CNV), the state body that regulates stock market activity, in which they informed investors that they would be adapting to the new regulations. Therefore, seven days from the deadline for several firms that have maturities before the end of the year, those who are in confusion claim that the conditions for renegotiation are not entirely clear and that there are still many doubts, such as whether a company like YPF, which has already restructured its debt, should refinance the 60% already restructured.

In any case, and despite the sensitivity of the situation, Reich warns that a report such as Moody's does not necessarily mean these companies would default: the rating agencies have restrictive and structured criteria that mean that, when faced with a change of conditions for a corporate bond, the issuing firm may be classified as "in default" even though it is complying with its payments.

By: Sofía Terrile