Trade Alert: Argentina

ARGENTINA

On 12 September 2021, President Alberto Fernández’s Justicialist party suffered  significant losses in Argentina’s midterm primaries. The center-left Justicialist have overseen an increase in poverty, annual inflation rise to greater than 50 per cent, and one of the highest COVID-19 deaths per capita despite implementing strict lockdowns. Juntos, the centre-right coalition, achieved 41 per cent of the nationwide vote leaving the government only gaining 30 per cent. Despite being a midterm primary, this result provides an indicator for the midterm elections on 14 November 2021.

Argentina’s restructuring of USD65bn foreign bonds in August 2020 provided light relief for its unstable economy which has suffered three defaults this century. After long negotiations, creditors were offered 55 per cent on the dollar. Argentina announced that it had obtained the majorities required under the collective action clauses (CACs) to exchange 99 per cent of the eligible bonds obtaining a level of acceptance of 93.55 per cent of the bondholders. President Alberto Fernández stated: “We’re making good on our word to put the country back on its feet and that the debt wasn’t going to impede us from achieving a process of development for our jobs and production”. 

The Argentine peso has suffered further depreciation in recent times with investors expecting a currency devaluation after the midterm elections on 14 November 2021. The official exchange market and unofficial exchange market’s spread has widened to a record gap, with USD1 now worth ARS196 on the unofficial market in comparison with USD1 equivalent to ARS99.35 on the official exchange. Despite the threat of inflation, since the midterm primaries, the Argentinian government has sought to win back voters with the expansion of price controls and increased social spending.  

SPECIAL THANKS

We appreciate the assistance of Pablo J. Gayoland Agustina Maria Ranieri of Marval O'Farrell Mairal with the following discussion of Argentinian law, regulation and practice. 

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 common 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

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.

SECURITY AND TRUSTS / AGENCY

Argentina has trusts and agency rules which are governed by 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 1 per cent of the value of the agreement as defined in the tax code. 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. 

FORMALITIES, 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.

EQUITABLE SUBORDINATION

We congratulate Brown Rudnick’s Corporate Practice Partner Adolfo Garcia for his recognition in Latinvex’s “Latin America’s Top 100 Lawyers.”

Brown Rudnick’s Latin America team has extensive experience on a broad range of matters, including representing companies with cross-border business opportunities, litigation, and arbitration across the globe. 

NOTABLE TRANSACTIONS

LA RIOJA PROVINCE 

Fitch Ratings Inc has upgraded the Argentine province of La Rioja’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to CCC- with a Stable Rating Outlook from RD. furthermore, Fitch improved La Rioja’s Standalone Credit Profile to ccc-from RD.

La Rioja is a province in western Argentina with a population of 370,000. La Rioja issued the green bonds to finance the construction of wind farms in the province. The venture was in conjunction with the state-owned firm Integración Energética Argentina Sociedad Anónima (IEASA).

The improvement in Fitch’s ratings is due to La Rioja’s distressed debt exchange on 27 September 2021 of USD295,800,000 of its USD300,000,000 9.75 per cent senior unsecured notes due in 2025.  Creditors of 98.61 per cent of the debt accept the consent solicitation and this majority was above the 75 per cent threshold outlined in the bond’s collective action clauses, bringing all bonds into the restructuring.

La Rioja in return issued USD18,427,444 of notes and paid USD24,847,500 in cash to bondholders who gave approval to the consent solicitation before 27 September 2021.  The consent solicitation sought to extend the maturity of the bonds from 2025 to February 2028 and alter the interest payment rate. The bondholders will receive an interest rate of 3.5 per cent in 2021, 4.75 per cent in 2022, 6.5 per cent in 2023, and from there 8.5 per cent through to the maturity date. 

BUENOS AIRES PROVINCE

On 30 August 2021 Buenos Aires Province announced that it had won creditor support to restructure 98 per cent of its USD7.1bn defaulted debt. Buenos Aires Province will swap all of the bonds it had offered excluding dollar denominated notes (USD900m) due for 2021 and euro denominated bonds due 2020 (EUR95m) which had been issued under different rules requiring a higher creditor participation threshold.

This exchange rewards the combative Buenos Aires Province Governor Axel Kicillof, who has sought to structure the deal disincentivising creditors holding out. The bonds had collective action clauses forcing investors to participate in the exchange if enough bondholders voted in favour of the deal. In addition, the bondholders who voted against the deal but were dragged along due to the prevailing majority, were to be subject to less favourable terms.

Walter Stoepplewerth, Chief Investment Officer at Portfolio Personal Inversiones stated, “it’s yet another deal to kick the can down the road and give the economy time to heal and recover [and] it avoids nasty litigation that could have complicated the province’s access to multilateral loans”.

The new bonds are valued at 51 per cent on the dollar and mature in 2037. Bondholders who accepted the deal will have 90 per cent of the interest accrued during the default attached onto the bond’s principal and the final 10 per cent being distributed as a cash payment of interest.

Buenos Aires Province, the nation’s largest with 18m people and wealthiest province with two fifths of the country’s GDP, has encountered significant financial problems in the last year. In February 2020, the province was compelled to pay Fidelity Investments USD250m despite appealing for a delay.

YPF SOCIEDAD ANÓNIMA

(“YPF SA”)

On 11 August 2021, YPF SA, the Argentine national oil and gas company, released its second quarter financial results with profitability improving and surpassing pre-COVID levels. YPF SA’s adjusted EBITDA increased 41.4 per cent quarter on quarter to USD1,084m, which is an increase of 14.3 per cent compared to 2Q19. Free cash flow (FCF) rose by 9.4 per cent in 2Q21 to USD311m bringing a 1H21 total of USD595m. This positive increase will be used by YPF SA to reduce its net consolidated debt by an additional USD253m totalling USD6,499m. This brings the group’s net-debt-to-last-twelve-month-adjusted-EBITDA ratio down to 2.7x which is back within debt covenant limits.

The report states that YPF’s maturities outstanding in 2H21 are mainly local loans, trade lines, and bonds, with close to USD110m in cross-border maturities, including USD43m of international bonds. Earlier this year, on 11 February, YPF SA agreed with creditors to swap 60 per cent of USD413m due in March 2021, avoiding a default. In addition, the group won 43 per cent of creditor support to exchange its 2024 notes and for the 2025 securities, the group found 37 per cent of holders willing to swap for new bonds.  This debt restructuring brings the group USD630m of debt relief through to next year. 

GUNVOR GROUP LTD

(“Gunvor”)

Gunvor, one of the largest energy traders in the world, has reduced its trading positions in response to surging gas prices and margin calls.

Due to market volatility, Gunvor has been subject to USD1bn of margin calls for its liquefied natural gas (LNG) and gas trading positions. It has been noted that Gunvor has USD3bn in readily available liquidity to cover any excess exposure to come in the near future. The group announced on 13 October 2021 that while “there have been margin calls associated with the recent natural gas price rally, Gunvor has the processes and instruments in place to effectively manage this volatility. Every margin call associated with natural gas and liquefied natural gas (LNG) made during the last several months has been paid.”

On 30 September 2021, Gunvor returned to the bond market for the first time since 2013, as it successfully issued USD300m Senior Unsecured RegS Notes priced at 6.25 per cent, with a 5-year tenor and maturity date of 2026. Citigroup Global Markets Limited coordinated the issue as Muriel Schwab, Gunvor’s Chief Financial Officer, thanked investors: “this transaction is an important milestone in our long-term financial strategy to diversify our funding sources and lengthen our debt maturity profile, further reinforcing our liquidity position”.

Gunvor posted its first half year results and indicated an increase in trading volumes by 28 per cent to 118m tonnes in the first 6 months. Revenues from the group increased to USD47bn reflecting a strong year for the commodity trader due to increasing demand for crude oil and natural gas. 

ROYAL DUTCH SHELL PLC

(“Royal Dutch Shell”)

On 20 September 2021, Royal Dutch Shell announced that it had agreed with ConocoPhillips on the sale of its Permian business for USD9.5bn in cash.  The transaction is dependent on regulatory approvals and the expected closing is in Q4 2021 with Morgan Stanley and Tudor, Pickering, Holt & Co advising Shell on the transaction. The USD7beived from the transaction will be used in additional shareholder distributions after the closing and used to strengthen the balance sheet.  Wael Sawan, recently appointed Shell’s Head of Gas and Renewables, stated: “After reviewing multiple strategies and portfolio options for our Permian assets, this transaction with ConocoPhillips emerged as a very compelling value proposition”.

The Permian business has 225,000 net acres with a production capability of 175,000 barrels per day. For the year ending 2020, the Permian business recorded a before-tax operating loss of USD491m. The acquisition will create an extra 200,000 barrels of oil of daily production for ConocoPhillips, it noted, and it will make the group the second largest producer of oil in the Permian Basin.  ConocoPhillips’ CEO Ryan Lance outlined: “the world is going through an energy transition, there will be an increased demand for the product going forward so we want to be in the best basins, the lowest-cost of supply basins around the world and that’s what the Permian Basin represents”.

This sale reflects Shell’s divergence from fossil fuel reliance and into energy transition. In May 2021, Shell Chief Executive Ben Van Beurden announced that the group expects clean energy to make up half of the group’s energy mix in the next decade.

 ASHMORE GROUP PLC

(“Ashmore”)

On 14 October 2021, Ashmore announced that its assets under management (AUM) decreased in the three months ending 30 September. In total, Ashmore’s AUM declined 3.3 per cent to USD91.3bn with net outflows of USD1bn and a USD2.1bn portfolio decline.  Reflecting, Ashmore’s Chief Executive Mark Coombes stated: “Investors have focused increasingly on the global growth outlook, including the impact of higher commodity prices, supply chain challenges and China’s ongoing reforms.”

Ashmore has significant exposure to the most indebted group in the world, China Evergrande Group, with it being one of the biggest holders of Evergrande’s bonds at USD433.1m. David McCann, an equity research analyst at Numis Securities Limited, commented: “Ashmore’s exposure to Evergrande and the wider Chinese real estate sector has undoubtedly been a component of the recent additional underperformance.” The group’s shares have declined by 25 per cent this year and according to UBS AG analysts, 85 per cent of Ashmore’s holdings were outperforming their benchmark by September this year, in comparison to 96 per cent doing so at the end of June. 

On 3 September 2021, it was announced that Ashmore Group’s pre-tax profits for the year ending 30 June 2021 were GBP282.5m, an increase of 28 per cent. This is partly due to the difficulties emerging markets faced last year but also to the increase in vaccination levels in the emerging markets. Tom Shippey, the group’s Chief Financial Officer reflected: “emerging markets are in pretty good shape. Vaccinations are being rolled out and there is an expectation that this will increase in the next nine months”.

CONTACT 

Please contact Louisa Watt or Iden Asl with any queries regarding this month's Trade Alert. 

DISCLAIMER:

This publication is for general purposes and does not provide comprehensive or full legal advice. It is based upon public information available at the time of publication and is subject to change. Brown Rudnick LLP does not accept any responsibility for losses that may arise from reliance upon information contained in this update. This publication is intended to give an indication of legal issues upon which you may need advice. The contents of this update may not be relied upon as accurate or sufficient and full legal advice should be taken in relation to specific trading situations.