Goldman Loan Talk Propels Biggest Bond Advance: Argentina Credit

Argentina’s effort to repair ties with overseas investors is starting to yield results in the bond market as the country tries to stem a plunge in foreign-currency reserves.

Its dollar-denominated notes surged by the most of any emerging market, adding to a 9.2 percent rally in March, after the government said it received loan proposals from international investment banks. The statement was in response to a newspaper report on March 30 that said Argentina is close to getting a two-year, $1 billion loan from Goldman Sachs Group Inc. at an interest rate of 6.5 percent, less than the nation’s similar-maturity bonds that yield 11.28 percent.

The loan would provide Argentina, which hasn’t issued overseas bonds since its $95 billion default in 2001, with a crucial source of hard currency at a time when the reserves it uses to pay debt are at a seven-year low. The financing would also show President Cristina Fernandez de Kirchner is succeeding in restoring investor confidence after settling creditor disputes at the World Bank, agreeing to compensate Repsol SA for its seizure of YPF SA and revamping its inflation index.

“The market has been optimistic about Argentina for a while now due to the change in attitude toward more pragmatic and orthodox policies,” Diego Ferro, the co-chief investment officer at Greylock Capital Management LLC in New York, said by e-mail. “In that context, regaining market access would be a logical step.”

Budget Deficit

Goldman Sachs spokesman Michael DuVally declined to comment on any proposals or talks with Argentina.

The central bank is negotiating the final details of the loan with Goldman Sachs including guarantees, Buenos Aires-based newspaper Pagina/12 reported, citing a government official it didn’t identify.

The bond-market advance pushed down Argentina’s average yields to 10.8 percent. As recently as Feb. 3, they were as high as 13.61 percent, according to JPMorgan Chase & Co.

The Economy Ministry said in a statement on March 30 that while the government isn’t planning any foreign currency debt sales in the short term, it has received proposals from investment banks it didn’t identify.

“Different financial entities have presented proposals to obtain foreign financing at maturities and interest rates in line with other countries in the region,” the ministry said.

Subsidy Cuts

Fernandez, hamstrung by a growing fiscal deficit and a shrinking trade surplus, has authorized her economic team led by Economy Minister Axel Kicillof to settle decade-old investment disputes to gain access to fresh financing before the end of her term late next year. Argentina will begin to cut gas and water subsidies by 20 percent beginning today. Utility rates have been largely frozen since 2003 and an increase in gas imports have drained reserves as domestic output declines.

“Given what they’ve been doing in recent days like changes to subsidies, they’re cognizant of the need to maintain this change in policy,” Marco Santamaria, a money manager at AllianceBernstein LP, which oversees $25 billion in emerging-market debt, said by phone from New York.

Robert Abad, who helps oversee about $53 billion of emerging-market debt at Western Asset Management Co., said Argentina’s legal dispute with creditors who rejected its debt restructurings will continue to make it difficult for Argentina to obtain the financing it needs.

Holdout Litigation

Creditors led by Elliott Management Corp.’s Paul Singer have won lower court rulings to be paid in full at the same time Argentina services its restructured debt. The effects of the ruling are on hold pending an appeal to the U.S. Supreme Court. About 93 percent of creditors accepted losses of 70 percent in the restructurings. Argentina has said paying holdouts in full could expose it to $43 billion of claims that would lead it to default again.

“They have a lot more work to do, a loan here and a loan there won’t bring liquidity relief that makes the math sustainable,” Abad said in a telephone interview from Pasadena, California. “This legal issue can create a big dent to what happens. It’s hard to set the parameters to how much they have to set aside.”

The government has $5.9 billion of bonds due in October


Argentina obtained $938 million in financing from the Inter-American Development Bank during meetings on March 29, Buenos Aires-based newspaper Ambito Financiero reported yesterday. The government is also in “advanced talks” with the World Bank for $3 billion of loans, Cabinet Chief Jorge Capitanich said yesterday.

‘High Probability’

Argentine bonds will continue to gain, according to Barclays Plc. Average yields are still double the average in emerging markets.

“Valuations are still attractive, and the market will continue to rally,” Donato Guarino, a strategist at Barclays, said in a telephone interview from New York. “There’s a high probability that they will get back on the international market.”

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