On 28 October 2019, Alberto Fernandez was elected as president and formally took office on 10 December 2019, replacing Mauricio Macri.
The country is in the midst of an economic crisis. During Macri's tenure, Argentina's GDP fell by more than 3 per cent, inflation surged and there was a currency crisis resulting in a USD 57bn International Monetary Fund ("IMF") bailout (the largest loan in the organisation's history). Argentina remains in deep recession, with inflation of more than 50 per cent and a weakened peso.
On 21 January 2020, Nobel Prize-winning economist Joseph Stiglitz warned investors in Argentine debt that there will need to be "significant haircuts" in any renegotiation and thus major losses. Stiglitz mentored Argentine Economy Minister Martin Guzman, who is in charge of renegotiating Argentina's debt. Guzman has proposed a "debt sustainability" bill to provide a legal framework in which to improve debt terms, interest charges and amounts of capital. Guzman emphasised that Argentina is willing to pay its debts, but requires relief from creditors to be in a position to do so. Argentina's lower house of Congress approved this bill on 29 January 2020, with 224 votes in favour and 2 against, and it was approved unanimously by the Senate on 5 February 2020.
Argentina began to reorganise its debt in August 2019, including a restructuring of USD 100bn in sovereign debt, (which includes the USD 57bn credit facility granted by the IMF in 2018). The Argentine Federal Congress passed the Social Solidarity and Productive Reactivation Law No. 27,541 (the "Law"), published on 23 December 2019 in the Official Gazette. The Law declared a public emergency in, amongst others, economic, financial, fiscal and administrative matters. Important legislative powers are delegated to the Argentine Executive on the basis of the Law. One of the main aspects provided by the Law relates to sovereign debt. The Law sets forth general provisions aimed at granting powers to the Argentine Executive to implement a public debt restructuring process. It authorises the Argentine Executive to carry out the procedures and take the necessary steps to recover and ensure the sustainability of the public debt of the Argentine Republic.
Guzman held a "very productive" meeting with the IMF in New York on 28 January 2020 to discuss the situation. Negotiating with the IMF, a major creditor, is seen as key as Argentina hopes to avoid a default on its obligations. It is reported that President Fernandez wants renegotiation talks with private creditors and the IMF completed by 31 March 2020 due to debt payments rising steeply after that date.
The province of Buenos Aires offered holders of a 2021 bond as a "sweetener", an additional interest payment on deferred capital amounting to USD 28.70 for every USD 1,000 of deferred capital, if they agreed to delay a USD 250m amortisation payment due 26 January 2020 until 1 May 2020. Not enough creditors voted in favour by the 22 January 2020 deadline for the consent solicitation period, so it was extended firstly until 31 January 2020 and then until 3 February 2020. Reuters notes that this is the "first major test for the South American country as it grapples with complex talks" to restructure its debt. Buenos Aires was ultimately unsuccessful in its attempt to delay payment until May with just over half of creditors accepting. On 4 February 2020, it finally agreed to repay the USD 277m to bondholders thus avoiding a technical default. As a result of this news, the value of the bonds concerned rose around 10 per cent to 58 cents on the dollar. Argentina's century bond also received a value increase of more than 3 per cent to 47 cents on the dollar and a bond due to mature in 2028 rose to the same level. It was also announced that Argentina was planning a debt swap auction on 3 February 2020 to swap a dual currency 2020 bond maturing on 13 February 2020 with outstanding payments of USD 1.6bn for new instruments maturing on 5 August 2021. On 4 February 2020, USD 164m of sovereign bonds due for repayment this month were converted into the new instruments maturing in August 2021, with USD 126.51m being converted into instruments denominated in pesos - an advantage for the Argentinian government given the pesos 38.62 per cent slide against US dollars last year.
Analysts predicted in September 2019 that bondholders are likely to recoup 30 to 40 cents on the dollar on Argentina's international notes if the country goes through with a restructuring. Citigroup has suggested that private lenders are likely to be affected the most, with some interest payments cut by about 65 per cent and maturities extended by around 10 years.
Creditors and the government will be hoping to avoid a repeat of the "15-year battle" that played out from 2001 to 2016, triggered by Argentina's default on sovereign and corporate debt obligations. Elliott Capital Management ("Elliott") owned government bonds on which Buenos Aires defaulted in 2001. Around 93 per cent of Argentina's USD 100bn bonds were formally restructured in 2005 and 2010, with holders receiving 30 cents on the dollar. Elliott was one of several "holdout" creditors, refusing to accept a large loss on its investment, and successfully sued Argentina in the US courts for full recovery of assets. In pursuit of Argentine assets, in 2012 Elliott convinced a Ghanaian court to detain an Argentine naval training vessel via an injunction and interim preservation order whilst it was docked in their jurisdiction. Elliott waited for the ship to stop in a port where it would be able to enforce legal judgments previously awarded by UK and US courts. After a change of its government, Argentina eventually settled and the fund received USD 2.4bn, almost four times its initial investment. In an attempt to prevent a similar occurrence in the future, Argentina included "single-limb collective action" clauses to recently issued debt. These force owners of specific bonds to accept a deal approved by a vote of 75 per cent of holders of all issued bonds, making it more difficult for a small group of creditors to hold out.
ARGENTINE LEGAL SYSTEM
Argentina is a federal union of 23 provinces (or provincias) and a federal capital district, the City of Buenos Aires. The Argentine legal system is a civil law legal system. Argentina’s first Civil Code dates back to January 1871. It was in effect until 1 August 2015, when Argentina replaced it with a new Civil and Commercial Code (known as Código Civil y Comercial de la Nación). The federal government is made up of the executive, legislative and judicial branches, and each province has three similar branches as well. The Argentine judicial system is divided into federal and provincial courts. The Corte Suprema de Justicia de la Nación (the “Federal Supreme Court”) is the highest court in Argentina.
KEY POINTS FOR TRADERS
- Banking licence or authorisation from the Central Bank may be required if a lender is conducting banking activities or "financial intermediation".
- Debt trading can occur by way of assignment or funded participation agreement. Novation is not a recommended form of transfer as security may be released.
- Registration and/or notarisation may be required to transfer the benefit of security, depending on the nature of the security.
- Lenders in Argentina may be subject to income tax, VAT and turnover tax on interest. Stamp tax varies by province. Withholding tax applies at a rate of 15.5 per cent or 35 per cent (depending on the lender's domicile and if the lender is a bank or a financial institution).
BANKING LICENCE REQUIREMENTS
Lending activities are, in principle, not subject to a banking licence requirement to the extent that such activities are not considered to be "financial intermediation" by the Central Bank.
"Financial Intermediation" is the combination of raising funds (either in Argentina or in other jurisdictions) and granting financing to third parties in Argentina with such funds.
If lending activities are carried out by a foreign entity utilising its own funds, with no financing being obtained in Argentina, in principle, no licence should be required. However, it should be noted that the Central Bank may decide to regulate entities that have a significant impact on the market even if they do not carry out financial intermediation.
The foregoing analysis remains the same for both term and revolving loans. However, the provision of a revolving loan is more likely to be considered a regular lending activity in Argentina which may necessitate the establishment of a subsidiary or branch in Argentina.
METHOD OF TRANSFER
The main methods of loan transfer in Argentina are (i) assignment of rights or (ii) assignment of contractual position, which assigns the rights and obligations of an existing lender to a new lender.
Assignment of Rights - Notice of the assignment of rights must be given to the borrower to make it effective against the borrower. To make it effective against third parties, the notice to the borrower must either be given (a) by public instrument (instrument público), most commonly done by way of notarisation, or (b) by a private instrument with a certified date. Borrower's consent is not required.
Assignment of a Contractual Position - Borrower's consent is required. This consent can be provided prior to, simultaneously with or following the transfer. Any guarantor must also expressly authorise the assignment of a contractual position for the assignee to take the benefit of any guarantee.
Novation - The general principle is that novation will have the effect of releasing security or any guarantee given in respect of the loan as the original obligations are terminated. As such, it is not a recommended form of transfer (unless the debtor's and guarantor's consent is obtained). This analysis may change once the provisions of the Productive Financing Law (as discussed below), which permits collateral agents to hold security and guarantees on behalf of a group of lenders, is tested in court. If a loan is transferred by way of novation, then the consent of the borrower is required. If the guarantor or security provider is party to the novation agreement, then the associated security / guarantee will remain in place for the benefit of the assignee.
Funded Participation - Funded participation agreements can be entered into in Argentina on a case-by-case basis, and they are usually governed by New York or English law, with the Loan Syndications and Trading Association ("LSTA") form, governed by the former, being the preferred choice. Argentine legal advice should be sought at the time of structuring the trade, as fully funded participation agreements deemed to be transferring 100 per cent of the risk are subject to close scrutiny, and may trigger tax and regulatory issues.
SECURITY AND TRUSTS/ AGENCY
Argentina has trusts and agency rules which are governed by the contractual constructs.
On 9 May 2018, the Argentine Congress passed the Productive Financing Law which introduced significant reforms to the Capital Markets Law No.26, 831. This law was introduced with the aim of developing Argentina's economy and creating a modern regulatory framework. One of the reforms was in respect of collateral agents for financial collectives. Prior to the introduction of this law, all creditors were required to be registered as secured parties instead of registering the security in the name of an agent or trustee.
The Productive Financing Law provides that parties may agree, in respect of loans with two or more lenders, to the creation of a mortgage or pledge guarantee in favour of a collateral agent who will act for the benefit of the creditors. In such cases, the secured loans can be transferred to third parties and the assignees will become the beneficiaries of the security without the need to register the transfer of the security. As such, the holder of the guarantee is dissociated from the holders of the secured loans and the transfer of the credit is permitted without the necessity of modifying the mortgage and pledge guarantees.
Foreign trusts and agency agreements will be recognised under Argentine law if the agreement has international elements. The general principle is that such structures are governed by the laws of the jurisdiction where the assets are located.
A properly created trust may remove the asset from the estate of the debtor in insolvency scenarios.
TAX AND STAMP DUTY CONSIDERATIONS
Stamp tax is a local tax in Argentina and therefore varies in each province. The City of Buenos Aires has its own applicable legislation. In the City of Buenos Aires, the tax rate for the transfer of a loan where the security is real estate is 0.75 per cent of the value of the agreement. Other jurisdictions, such as the Province of Buenos Aires, have a rate of 1.8 per cent.
Foreign lenders may be charged income tax on Argentine source income. The transfer of real estate by foreign entities will be subject to income tax. The effective tax rate will be 17.5 per cent on the sale price (the presumed tax rate) or 35 per cent on the result of the sale (the real tax rate).
Interest payable on loans made by foreign lenders is subject to withholding tax. The rate of this tax will be 15.05 per cent or 35 per cent depending on the jurisdiction of the lender.
VAT applies to the sale of goods, the provision of services and the importation of goods and services. Interest arising from a loan granted by a foreign entity is subject to VAT and the Argentine debtor is responsible for the payment of tax. The tax is levied on interest paid at a rate of 21 per cent unless such loans are granted by a foreign lender whose central bank in its country of incorporation has signed up to the Basel Regulations, which reduces the rate to 10.5 per cent.
The activity of lending money (even if only done once) is considered habitual for tax purposes and is therefore subject to Turnover Tax (meaning tax levied on gross income obtained from the exercise of onerous and habitual activities). This tax is only charged on interest (not any repayments of principal). It is not clear if this Turnover Tax will apply to foreign lenders. This rate varies in different provinces in Argentina.
NOTARY REQUIREMENTS AND ENFORCEABILITY
Depending on the transfer method and the type of security, a transfer may require additional formalities such as notarisation or registration of the security. If the security is to be registered, then the registration formalities must be completed. It can take between one to six months to complete such formalities depending on the type of asset that needs to be registered.
If the security is a mortgage, the transfer should be implemented by a public deed and then registered in the Public Registry of Real Estate for the purposes of becoming effective vis-à-vis third parties. In order to be a public deed, it will need to be notarised before a public notary, which generally incurs fees of approximately 1 per cent of the principal amount, or lower for deeds regarding a high amount.
If the security is a registered pledge, then a public deed is not required to evidence the transfer (i.e. the deed does not need to be notarised and raised to the status of a public document) and an authenticated private instrument using forms provided by and filed with the Registry of Pledges is sufficient. The pledge becomes effective vis-à-vis third parties upon the above-mentioned filing.
ARGENTINA: FOREIGN EXCHANGE CONTROLS
On 1 September 2019, the Argentine government established an exchange control regime. This regime is comprised of several foreign exchange measures which restrict the purchase of foreign currency in the Argentine market and which impose repatriation obligations to exporters of goods and services. The most relevant foreign exchange controls and regulations that may have an impact in cross border financings are the following:
- Purchase and transfer of foreign currency by non-Argentine residents: Non-Argentine residents require the prior approval of the Argentine Central Bank to purchase foreign currency in the foreign exchange market and to transfer it outside of Argentina. Consequently, in a scenario in which the lender or guarantor enforces the security or guarantee in Argentina, the creditor will not able to transfer the funds abroad.
- Foreign financial indebtedness: For foreign financial loans disbursed after 31 August 2019, the debtor will be able to purchase foreign currency in the Argentine foreign exchange market to make the payments of interest and principal outside Argentina only if the disbursements of the loan have been entered into Argentina and sold for pesos in the Argentine foreign exchange market. The debtor does not have the obligation to enter Argentina and sell the disbursements in pesos but, in such case, it will not be able to access the foreign exchange market to pay the creditor.
- Repatriation Obligation: Exporters of goods and services are obliged to enter into Argentina and sell in the Argentine foreign exchange market the proceeds of their exports. This obligation may restrict the ability of the exporter to provide securities structures, which affect the proceeds of the exports.
Argentine legal advice should be sought before structuring trades relating to Argentine debt.
BROWN RUDNICK ADVISES ON USD 6.87BN TRADE TRANSACTIONS IN 2019
2019 TRADE TRANSACTION SUMMARY
PREMIER OIL UK LIMITED ("PREMIER OIL")
On 7 January 2020, Premier Oil announced a refinancing proposal in respect of USD 2bn of debt, extending the maturity date to November 2023, as well as multiple acquisitions in the North Sea including the acquisition of (i) Andrew Area and Shearwater assets from BP for USD 625m; and (ii) an additional 25 per cent interest in the Premier Oil-operated Tolmonst Area from Dana for USD 191m plus contingent payments of up to USD 55m. Premier Oil intends to purchase these assets by way of a USD 500m equity raise (net of expenses) which has been fully underwritten on a standby basis as well as existing cash resources. Premier Oil also announced that an Acquisition Bridge Facility of USD 300m could be used to fund these assets if required.
Premier Oil further announced on 7 January 2020 that it would enter into two court-approved schemes of arrangements to obtain creditor consent for the acquisitions, related funding arrangements and extension of credit facilities, creditor consent being a requirement following its 2017 restructuring.
Premier Oil faced opposition to its proposed plans from Hong Kong hedge fund Asia Research and Capital ("ARCM"), its largest creditor, which holds over 15 per cent of Premier Oil's debt and short positions of around 17 per cent of its stock. ARCM advised that it would "take all steps to oppose" Premier Oil's proposed refinancing plans. It is of the view that Premier Oil should sell assets to reduce its debt pile before entering into these acquisitions. However, Premier Oil argues that the acquisition would generate more than USD 1bn of free cash flow by the end of 2023. Representatives for lenders that support Premier Oil's proposals have noted that ARCM is the "sole voice of opposition" and highlight that it is the hedge fund with the "largest short position in Europe". ARCM's short position in Premier Oil is around four times larger than the average for London-listed firms.
On 16 January 2020, the Court of Session in Edinburgh approved Premier Oil's request to have a creditors' vote on the proposed schemes. The court also rejected ARCM's request to adjourn such a vote at this meeting. Premier Oil announced that it will convene the creditors meeting on 12 February 2020. It is reported that 86.03 per cent of the Super Senior creditors and 75.15 per cent of Senior creditors are expected to vote in favour of the statutory majorities, following which a further court application will be made to sanction the schemes. This hearing is expected to take place in March 2020.
The scheme of arrangement documents are available here.
HOLLAND & BARRETT ("H&B")
Mikhail Fridman, the Russian billionaire, has been under pressure in recent months to inject new funds into his vitamin chain H&B, as it seemed set to join other high street casualties. In December 2019, loans which funded the acquisition of H&B in 2017 by LetterOne, Fridman's investment vehicle, were quoted as low as half of face value. LetterOne obtained permission from H&B's creditors to adjust terms governing its loans, making it easier to buy back the debt. The approval to amend the terms had a positive effect on the price of the loans, pushing it up to 62 cents on the euro in mid-January 2020.
FLYBE LIMITED ("FLYBE")
On 14 January 2020, it was announced that Flybe, the low-cost regional airline which has been in operation since 1979, was saved from the brink of collapse following a deal brokered between Flybe's shareholders and the British government. The rescue talks involved an agreement to defer certain tax payments amounting to over GBP 100m and the consortium of owners agreed to inject around GBP 20m of new money. This bailout was branded as a "misuse of public funds" by Willie Walsh, the chief executive of the owner of British Airways, IAG.
In February 2019, Connect Airways, a consortium of Virgin Atlantic, Stobart Air and Cyrus Capital rescued the company from insolvency. The investors paid GBP 2.8m for Flybe's operations and a further GBP 2.2m for the parent company, but were reluctant to provide additional funds for this latest rescue. Connect Airways pledged to spend GBP 100m as part of the sale to stabilise the airline's position. However, conditions recently deteriorated as Brexit and a weak pound caused increased uncertainty in the regional flight market.
Others in the market have struggled, most notably Thomas Cook and other low cost operators such as Norwegian Air Shuttle ("NAS"). NAS is described as having overstretched itself financially by launching transatlantic flights, reducing fares, and dealing with outside factors such as aircraft issues. As of November 2019, NAS had a debt burden of USD 6.8bn. It was reported on 20 January 2020 that South African Airways is also struggling, whilst attempting to continue operations as normal. The airline is currently undergoing a business rescue process and was due to receive ZAR 2bn in funding from the South African government as well as ZAR 2bn from lenders.
THOMAS COOK GROUP PLC ("THOMAS COOK")
The Thomas Cook brand is set to be relaunched by its new Chinese owner, Fosun Tourism Group ("Fosun"), in the first half of 2020. The company plans to use the tour operator's brand to target European customers. Fosun bought the trademarks and 18 per cent of Thomas Cook in November 2019 for GBP 11m but decided against funding a full rescue of the group.
Meanwhile it was announced on 24 January 2020 that Condor, the German airline in which Thomas Cook held a 49 per cent stake, was acquired by Polish carrier LOT for around EUR 300m. This followed the receipt of bids in January 2020 from buyout groups such as Apollo, Greybull and LOT. Condor continued trading following the compulsory liquidation of Thomas Cook after it received a EUR 380m bridging loan from the German government and filed for investor protection proceedings.
PROSAFE SE ("PROSAFE")
Offshore accommodation platform operator Prosafe has received consent from lenders to defer payments under its USD 288m facility from 15 January to 13 February 2020, whilst other defaults in the period have also been temporarily waived under both the USD 288m and a USD 1.3bn facility. USD 18.5m is owed to China's Cosco shipyard for a flotel built in 2016, and discussions on this payment and other arrangements are ongoing.
THE INTERNATIONAL BANK CORPORATION ("TIBC")
In December 2020, around USD 14bn worth of claims from over 70 financial institutions were approved by the Dammam Commercial Court against Ahmad Hamad Algosaibi and Brothers ("AHAB") and Saad Group. Over USD 7bn of the accepted claims related to AHAB, and around USD 6.5bn in respect of the Saad Group. TIBC, a Bahraini bank, had USD 3bn worth of claims against AHAB and the Saad Group. USD 1.8bn of TIBC's claims were approved (two of its four claims). The bank intends to appeal the court's rejection of the other two claims.
The court's actions are expected to provide relief to creditors, including international lenders such as BNP Paribas and JP Morgan. The resolution is also an important sign to international investors, as it has been achieved under new bankruptcy laws introduced in 2018 as part of reforms to make the kingdom more investor-friendly.