Argentina: Govt posts decree on FX bond swap, forces public entities to get 2036 dual bond

• Decree confirms public entities face compulsory swap of NY-law bonds for 2036 dual bond
• Public entities also forced to sell ARG-law FX bonds under conditions to be set by Treasury
• Govt says it will keep NY-law bonds, we believe it may sell them later at 25%-30% of face value
• FX bonds under ARG-law will be sold, unclear yet if govt sells FX debt to private sector at 40%+ interest rates
• Or sells to BCRA in roundabout scheme to get monetary financing

The federal government?published?Thurs. the urgency decree to make official a?scheme?in which public sector entities holding NY-law US dollar bonds will be forced to swap them for a new dual bond maturing in 2036. These entities will also be forced to sell or auction their ARG-law US dollar bonds under conditions dictated by the Treasury, and will have to reinvest 70% of the sell proceeds in local Treasury notes and spend the remaining 30% before the end of the year.

The details of the decree are pretty much in line with the information that had leaked to the press earlier in the week, with the only novelty being that the government will deliver a 2036 bond in the swap. It will be a bullet dual bond where the principal can adjust as either an inflation-linked bond or a US dollar-linked bond, with both options offering a 3.0% interest rate on top. The bond will be issued at a price that reflects an 8.0% implicit rate.

Overall, the details from the decree don't change our analysis of the whole operation. The USD 4.0bn swap of NY-law bonds will be relatively harmless if the Treasury holds on to the bonds?like economy ministry officials said they are going to do. We don't trust that this will be the case. Even though the bonds trade at 25%-30% of face value and consistently carry IRR rates of more than 35%, we believe authorities are capable of selling them if they believe the sales will buy them a few days of peace in the parallel exchange rate market.

As for the ARG-law US dollar bonds, the question that remains is whether the government intends to sell them on the market or to the BCRA. By selling them to the market, the government would buy a few days of peace for parallel exchange rates and get some local currency financing for its budget deficit, but at a massive cost. After all, selling those bonds to the market at current prices is essentially issuing new FX debt at interest rates of more than 40%. If the bonds are sold to the BCRA, the objective would be finding a roundabout way to unlock monetary financing for the budget deficit. The government wants to run a large deficit that it can't get market financing for, and the rules of the Extended Fund Facility (EFF) with the IMF limit how much direct monetary financing the BCRA can give. To dodge those rules, the BCRA would give the money to public entities in exchange for their ARG-law FX bonds, and the entities would use the money to buy new Treasury notes.