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Cablegate: Province of Buenos Aires Debt Exchange

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #3179/01 3641800
ZNR UUUUU ZZH
R 301800Z DEC 05
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2956
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2029
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM J5 MIAMI FL

UNCLAS BUENOS AIRES 003179

SIPDIS

SENSITIVE

SIPDIS

PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS
AND OCC FOR CARLOS HERNANDEZ
NSC FOR SUE CRONIN
USDOC FOR ALEXANDER PEACHER
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY
SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA


E.O. 12958: N/A
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Province of Buenos Aires Debt Exchange
Achieves 93 percent Participation.

1. Sensitive but unclassified. Not for internet
distribution.

-------
Summary
-------

2. (SBU) The Province of Buenos Aires debt exchange
closed on December 16. Preliminary results indicate
that the province received tenders for USD 2.8
billion of old bonds, achieving a 93 percent
participation rate, much higher than expected.
Holdouts, likely European retail investors, represent
the remaining 7 percent (USD 213 million). Financial
analysts put the offer's net present value at 45-55
cents on the dollar, well above the 35 cents offered
in the GOA debt restructuring in March, so it is not
a surprise that the province achieved a higher
participation rate. But the GOA's decision to prepay
the IMF also helped increase participation. Without
IMF support, prospects for holdouts from either the
GOA or BA debt exchanges look bleak. President
Kirchner has said that holdouts from the GOA exchange
won't be compensated during his administration.
Taking a similar hard line, Governor Sola said that
investors who did not participate in the provincial
exchange had lost their opportunity to be paid. End
Summary.

-------------------------
Launching of the Exchange
-------------------------

3. (U) On November 7, the Province of Buenos Aires
launched its exchange offer of new debt for its debt
that has been in default since January 29, 2002. The
exchange remained open for six weeks with an early
submission period ending on December 2 that was
intended as an incentive for retail investors to
participate. Investors' principal claims were USD
2.6 billion and past-due-interest totaled USD 1.6
billion. However, the province only recognized
interest at the original contractual rate until
December 31, 2001 and a 2 percent annual rate from
January 2002 to December 2005, resulting in past-due-
interest recognized of only USD 382 million.
Consequently, total claims (principal plus past-due-
interest) recognized by the province totaled USD 3
billion.

4. (U) After the launching of the exchange, officials
from the provincial Ministry of Economy along with
representatives from Citigroup - the financial
advisor for the exchange - went on a road-show
visiting the cities of Milan, Zurich, Geneva, London,
Boston and New York to promote the transaction.

-------------------------------------
The Defaulted Bonds and the New Bonds
-------------------------------------

5. (U) The eligible defaulted bonds included sixteen
instruments denominated in four different currencies
- out of which eight were EUR-denominated, six USD-
denominated, one JPY-denominated and one SFR-
denominated. The eligible bonds were issued under
New York, German and Swiss law.

6. (U) In exchange for the eligible bonds, the
province will issue on January 12, 2006 (the
settlement date of the transaction) USD 2.3 billion in
three types of bonds (denominated in EUR and USD --
interest rates indicated below are for USD bonds):

- A long-term Par bond maturing in 2035, with a step-
up coupon of 2 percent until 2007, 3 percent until
2009 and 4 percent until 2035 with no principal

reduction.

- A medium-term Par bond maturing in 2020, with a step-
up coupon of 1 percent until 2009, 2 percent until
2013, 3 percent until 2017 and 4 percent until 2020,
with no principal reduction.

- A Discount bond maturing in 2017, with a 9.25
percent coupon and a 60 percent principal reduction.

7. (U) The medium-term Par bond and the Discount bond
were limited to issuances of USD 500 million and USD
750 million, respectively, while the long-term Par
bond issue amount had no restrictions. Retail
investors (holders of bonds worth less than EUR
40,000) presenting their bids in the early-
subscription period (ending December 2) had priority
for allocation of the medium-term Par bond and the
Discount bond.

8. (U) Financial analysts valued the offer's net
present value at 45-55 cents on the dollar - well
above the 35 cents offered by the GOA debt
restructuring closed on June 2005. According to
analysts, this higher financial value guaranteed a
higher participation rate than in the GOA's exchange,
which reached 76 percent.

-----------------
Exchange Results
----------------

9. (U) Governor Felipe Sola announced the preliminary
results of the transaction after the exchange closed
on December 16. The GOA received tenders for USD 2.8
billion worth of old bonds, achieving a 93 percent
participation rate, higher than expected. Holdouts,
likely European retail investors, represent the
remaining 7 percent (USD 213 million). The final
results are expected to be released to the press by
December 23. The delay to present the formal and
detailed results (including issue amount of each
bond, participation by geographical area, etc.) are
due to the large number of orders received, estimated
to be more than 34,000. The medium-term Par bond and
the Discount bond that had limits on issuance were
both oversubscribed, according to information from
the provincial Ministry of Economy.

10. (U) Governor Sola said that the exchange
generated a debt reduction of USD 2 billion, which
represents 32 percent of the province's total
expenditures for 2005 and four times its health
expenditures. He attributed the success of the
transaction to the provincial Ministry of Economy's
cooperative approach and persuasion, and to the GOA's
firmness during its own debt exchange. Governor Sola
also attributed the higher than expected
participation in the exchange in part to President
Kirchner's announcement on December 15 (the day
before the provincial restructuring closed) that the
GOA will repay its entire USD 9.8 billion IMF debt.

11. (SBU) Comment: BA Province offered substantially
better restructuring terms than the GOA did, so it is
not a surprise that the province achieved a higher
participation rate. But the GOA's decision to prepay
the IMF also helped increase participation, because
it signaled that holdout investors would no longer
have IMF support for another exchange offer and
substantially reduced the likelihood that they will
be repaid anytime soon. Prospects for holdouts from
either debt exchange look bleak. The GOA has not
made any effort to deal with holdout creditors since
it closed its debt exchange in June, and President
Kirchner has said they won't be dealt with during his
administration. Taking a similar hard line, Governor

Sola said that investors who did not participate in
the provincial exchange have lost their opportunity
to be paid. End Comment.

12. (U) To see more Buenos Aires reporting, visit our
classified website at
http://www.state.sgov/p/wha/buenosaires

GUTIERREZ

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