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