As a result of the Argentine peso devaluation at the beginning of 2002, and some of the regulatory policies of the Argentine government since then, Argentine companies that incurred debt denominated in U.S. dollars on the international financial markets have suffered grave difficulties. Most of these companies defaulted, and while some of them have remedied their default, many others still remain in such condition. The external debt of these companies adds up to approximately US$35 billion and has been incurred, mainly, by issuing bonds and borrowing syndicated loans in the international financial markets.
The documents governing this international debt are generally governed by New York law. Debt issued in accordance with New York law requires unanimous approval by the creditors to change the currency applicable. Therefore, the Argentine companies must pay the external obligations in the currency that was originally contracted. Faced with the reality of default, Argentine companies are restructuring their external debt.
Consequences of Corporate Default
In accordance with the terms of most international bonds issued by Argentine companies, failure to pay in a timely manner in the agreed currency constitutes an event of default. In case an event of default occurs, holders of as little as 25% of the principal amount of the debt outstanding usually have the right to accelerate the term of the bonds and declare all sums immediately due and payable. In addition, each individual holder has the right to sue the debtor upon non-payment of the debt that it holds. U.S. courts, which have jurisdiction on the great majority of the international bonds issued by Argentine companies, have consistently ruled against the debtors upon default. Once judgment is granted by U.S. courts, the creditors may attach assets of the debtors located outside Argentina. In addition, the creditors would be able to execute the judgment against the debtors and attach their assets in Argentina, provided that certain procedural requirements of Argentine law are met.
The probability of such legal action depends on the particular situation of each company, its relationship with its creditors, the types of creditors (banks or bondholders), the advantages and disadvantages that the creditors see in suing the debtor, the assets of the debtor located outside Argentina, and the importance of the debtor's activities outside Argentina.
The Mexican Precedent
The Mexican peso devaluation of December 1994 brought that country to a grave financial crisis. It also created significant problems for those Mexican companies that had contracted significant debt in U.S. dollars in the international financial markets during the previous years. As of the beginning of 1995, the Mexican corporate sector had approximately US$40 billion in U.S. dollar-denominated international debt. A large number of Mexican companies were unable to make payments under these debts, thereby falling into default. Many Mexican companies entered into a restructuring process with their creditors. The mechanism most used was the exchange offer, under which the companies issued new debt in exchange for the original debt.
The various restructuring alternatives (many of which were successfully used in the Mexican financial restructurings, and also by the Argentine companies that have already successfully restructured their defaulted debt) include the following:
Exchange Offer for New Debt
The most feasible and widely used method of restructuring international debt in Argentina is the exchange offer, whereby current holders of bonds swap into new bonds that have financial terms more favorable to the company than the terms of the original bonds. The object of an exchange offer is to restructure the debt to fit the current financial profile of the company in a realistic manner.
A condition to every exchange offer is that it only takes effect if the holders of a minimum percentage, in excess of a majority, of the aggregate outstanding principal amount of the bonds exercise their option to accept the new bonds. However, the bondholders do not have the obligation to accept the new bonds.
Most exchange offers are coupled with exit consents, whereby the creditors who accept the exchange offer vote to change the terms of the old bonds as they exit them. Exit consents are used quite frequently in the United States to encourage other creditors, who may hold out and refuse to tender their bonds, to also accept the exchange offer so that they are not left with diminished bonds. The modifications to the old bonds are approved by a majority of the bondholders the moment they exchange their old bonds for the new bonds.
In many exchange offers, the bondholders request one or more of the following improvements in the credit quality of the new bonds, including that the new bonds: (1) become collateralized; (2) have more restrictive covenants, including schemes of cash-sweep; or (3) if possible, have a gradual amortization through a new sinking fund.
Covenant Relief and Amendment of Terms
In order to achieve relief from temporary liquidity problems, a company may seek amendments of, or waivers from compliance with, restrictive covenants contained its debt documents. Waivers are typically requested for a finite period of time, during which the company's management hopes that its financial condition will stabilize and improve, or during which the company will be able to negotiate a more comprehensive restructuring of its balance sheet.
Most international bonds of Argentine companies are issued under indentures governed by New York law. These indentures typically require the unanimous consent of each affected bondholder in order to amend any of the monetary terms of the bonds, such as: (1) a reduction in principal; (2) a reduction in the interest rate; (3) an extension of time for payment of interest or principal; or (4) a change in the currency in which payments are to be made. However, these indentures also frequently include financial and operating covenants that restrict various activities of the issuer, and these covenants typically may be amended and reduced by a vote of bondholders holding, generally, bonds representing at least a majority of the aggregate principal amount of bonds outstanding.
Other terms which generally may be amended by a simple majority vote of bondholders include: (1) changing the applicable court and law; (2) eliminating certain events of default; (3) increasing the percentage of holders of bonds required to accelerate the payment on the bonds after a default; (4) eliminating the obligation to list the bonds on a securities exchange; (5) eliminating negative pledge clauses, in which the debtor covenants not to pledge any assets if such pledging would result in less security for the bondholders; and (6) eliminating pari passu clauses, in which the debtor covenants not to issue new bonds with better conditions.
Redemption or Repurchase with New Financing
Another alternative is the redemption or repurchase of the issuer's bonds through a tender offer or through the secondary market, with funds provided through the issuance of new debt securities or new bank financing. For companies whose bonds are currently trading at a steep discount from their face value, repurchasing their bonds is a very effective means of reducing their indebtedness, provided that financing for such repurchases is available, either externally or from internal cash flow, and such repurchases are permitted under the applicable governing documents.
However, the voting rights of bonds are generally limited when an issuer or any of its affiliates repurchases them. In the current environment, few Argentine companies are in a position to issue new U.S. dollar-denominated debt securities, and interest rates in the domestic markets are very high, which makes refinancing in these markets expensive. The market for U.S. dollar-denominated bank loans in Argentina also appears to be presently inaccessible to almost all companies.
Sale of Assets or Additional Collateral
Many Argentine companies were successful in the past at borrowing on an unsecured basis, and, consequently, substantially all U.S. dollar-denominated international bonds of companies (other than securitized notes) currently outstanding are unsecured.
With a potentially large base of valuable and unencumbered assets, certain companies, including some that have issued U.S. dollar-denominated bonds, may be in a position to: (1) sell nonessential assets and use the proceeds to repurchase their outstanding bonds; or (2) collateralize their bonds so that holders will have a new secured obligation. Many times when a company collateralizes its bonds, it will seek concessions in return from its bondholders on other terms of the indebtedness, such as a reduced interest rate and an extended maturity.
Exchange Offer for New Equity
Another restructuring alternative involves the exchange of some portion of a company's bonds for new equity in the company. To the extent that bondholders are willing to exchange some portion of their bonds for new equity, most bondholders probably would prefer to receive American Depository Receipts ("ADRs") rather than shares of common or preferred stock. ADRs are denominated in U.S. dollars and (if registered with the SEC) can be easily traded in the United States.
Bondholders would value ADRs more highly than company stock due to the better liquidity of ADRs, which would lead bondholders to agree to a more favorable exchange ratio for ADRs as compared to company equity securities. Companies presumably would weigh this exchange ratio against the costs of compliance with U.S.-style disclosure standards and, possibly, an SEC registration, in determining the optimal equity currency in such an exchange.
The new equity securities should be registered with the SEC if the bonds to be exchanged were registered with the SEC, or if the issuer is planning on offering the equity securities to the public. This alternative may create disputes over the control of the company due to the dilutive effect of the new equity issuance. However, most international bondholders are not interested in controlling and managing a business in Argentina.
Equity Investment by Strategic Investor
An equity investment by one or more strategic investors is another restructuring alternative. U.S. and other international companies operating in Argentina in the same industry as the debtor may already be familiar with the debtor, and have a view as to the long-term viability of the debtor. These strategic investors may be willing to invest quickly in companies facing financial problems, like those now common in Argentina.
Creditors, including representatives of any bondholders' committee that may have been formed, generally participate in negotiations with a potential strategic investor in order to assure themselves that the terms of the new investment are sufficient to restore the financial health of the debtor, and do not include terms that may be adverse to their senior position. Equally important, creditors must assure the strategic investor that they are comfortable with the debtor's proposed new capital structure, and that they have waived and/or amended their debt documents so that no default will occur upon or shortly after the closing of the equity investment. Once the sale of equity is complete, the proceeds from the sale are applied to repay debt.
Acquisition of Company
Under this alternative the acquirer purchases the outstanding capital stock of the company and at the same time assumes the debt obligations of the company. Concurrently with or subsequent to the acquisition, the acquirer will negotiate with the bondholders and other creditors of the company to restructure the company's debt using any number of the previously discussed alternatives. The company's creditors may oppose a sale of the company in this manner if they think that such a sale would adversely affect their interests.
Court-Approved Reorganization
An Acuerdo Preventivo Extrajudicial ("APE") is a private restructuring agreement between a debtor and a certain percentage of its unsecured creditors affected by the restructuring. This agreement is submitted to a bankruptcy court for approval pursuant to the Argentine bankruptcy law. The APE was a legislative innovation approved right after the devaluation at the beginning of 2002 to assist companies in their financial restructuring.
The Argentine bankruptcy law requires the debtor to have the support of: (1) holders representing two-thirds of its total outstanding unsecured indebtedness (based on the outstanding amount of principal and interest); and (2) a majority of its creditors (based on the total number of creditors) in order to obtain court approval for the APE. Once the APE is approved, its terms and conditions apply to all of the unsecured creditors, even to those that voted against the restructuring.
The Argentine bankruptcy law requires that an APE proposal treat equally all unsecured creditors under similar situations; however, different options may be offered to different categories of creditors. An APE must describe the debtor's proposed new terms and conditions for the payment of its outstanding indebtedness, which may include partial forgiveness of debt, extensions of maturity dates and any other valid option agreed to by the requisite holders.
A debtor must also file the following documents with its APE: (1) an assets and liabilities statement valued as of a cut-off date, which must be a date not earlier than five Argentine business days following the date on which all parties have entered into the APE, and not later than five Argentine business days prior to the APE filing date; (2) a schedule listing its creditors; (3) a schedule listing any pending lawsuits and administrative procedures against the debtor; (4) its accounting records and other books; and (5) the amount of existing indebtedness held by unsecured creditors that have entered into the APE, and the percentage they represent compared with all other unsecured creditors.
Court-Supervised Reorganization
If an out-of-court or court-approved restructuring agreement cannot be achieved between the company and its creditors, the last alternative is to attempt to reorganize the company under the supervision of a local bankruptcy court. The current state of the insolvency laws in Argentina means that international creditors generally prefer negotiated out-of-court or court-approved restructurings, and engage the local bankruptcy courts only when their options are severely limited.
In addition, while a Chapter 11 filing in the U.S. no longer carries heavy negative connotations for the debtor and its business, the Argentine "concurso preventivo" might stigmatize the debtor and can be extremely harmful to its reputation in the business community.
Conclusion
Due to the peso devaluation in Argentina, most Argentine companies encountered difficulty in repaying their international financial obligations in accordance with the terms under which they were incurred. In most cases the creditors have attempted to restructure the debt by reaching an out-of-court agreement with the company, while some companies have entered into APEs. The most widely used out-of-court restructuring method is the exchange offer, whereby the original debt of the company is replaced with new debt with modified terms, which are negotiated between the company and its creditors.