Could coronavirus, oil plunge hamper Argentina debt talks, Vaca Muerta production?

A less favorable external environment and coronavirus fallout could make Argentine debt restructuring negotiations even trickier.

Authorities want to strike deals with private creditors as well as the IMF, which in 2018 granted the country a US$57bn credit facility.

Showing progress, the government this week issued a decree outlining plans to revamp up to US$68.8bn in US, European and Japanese bonds.

Cash-strapped Argentina says that, to meet its debt obligations, it needs time to reboot its economy, which may start limping out of recession toward the end of the year, according to research firm Moody’s Analytics, adding the coronavirus could delay any recovery.

The IMF has endorsed haircuts on private bondholders, admitting the country’s debt burden has become unsustainable.

Reaching restructuring agreements with debtors promptly is seen as vital to start reducing uncertainty and restoring market access. Investors – including those in the electric power and oil sectors – are largely in wait-and-see mode.

Towards the end of 2019, Argentina’s overall debt pile stood at around US$320bn. This year some US$40bn in private sector debt – which totals about US$120bn – falls due, according to local consulting firm Ecolatina.

“This debt restructuring that they are going to enter into could become even more complicated with all these recent developments,” S&P sovereign ratings managing director Joydeep Mukherji told a webcast.

“First of all, when you have this kind of global uncertainty, it’s just harder for everyone to coordinate and undertake what would simply be a very, very complicated debt renegotiation.”

The “overall external context is much worse” for Argentina, said Mukherji, citing the low probability of a global commodity boom within the next several years – which would bring more dollars into the country – and weaker oil prices.

The message was echoed by Juan Pablo Fuentes, an economist at Moody’s Analytics.

Fuentes told a webcast, “the current situation, with the turbulence in the financial markets, could make negotiations a little more complex, given the existing volatility.”

He doubted that authorities could complete negotiations by the planned deadline of end-March. “Negotiations won’t be easy,” Fuentes said, adding he was confident deals would be struck but that they would take “longer than expected.”

A main sticking point in talks with private bondholders will be the size of the haircut. 

Argentina’s golden goose – the Vaca Muerta formation – could become egg-bound if oil prices make E&P unprofitable. 

In a report on the global outlook, Moody's Investors Service said: "The decline in oil prices will severely stress the E&P sector on top of its limited access to capital and high refinancing requirements in 2020-21. The culmination of supply and demand shocks will force producers to take drastic action on costs and make further reductions in capital spending to cope with the difficult price environment in 2020."

The Argentine government is hoping the massive Vaca Muerta deposit, where activity has already been impacted by price and capital controls and concerns over policy, will bring more dollars into the country and help power an economic recovery. 

“That’s going to be even harder now, given what’s happening to the price of oil and, I think, overall investor sentiment,” Mukherji said. “Let’s just say things are going to be more complicated for Argentina.”

S&P expects an average Brent price of US$40/b this year – down from an earlier estimate of US$60/b – citing the impact of a price war between Russia and Saudi Arabia and overall weaker demand stemming from the coronavirus fallout.

Moody’s Analytics expects prices to average around US$45/b this year. For 2021, S&P expects an uptick to US$50/b.

Oil prices plunged around 25% on Monday but rose 8.3% on Tuesday. 

Industry consensus suggests Argentine oil players were counting on a crude price closer to US$50-60/b and have a break-even price of around US$40/b. Were the international price to stabilize at lower levels, it would erode companies’ margins and discourage investment to increase production. 

Vista Oil CEO Miguel Galuccio told an investor conference last month that, after price shocks of 2019, the company was introducing flexibility in its supply contracts. “I don’t think there’s a magic number where we could stop or accelerate,” he said, adding that the company’s projected 2020 Ebitda assumed a price of US$55/b.

Globally, cuts in E&P stemming from weaker prices could lead to a deficit within 12 months, which would help spur prices on, Moody's Analytics said.