The devaluation of the national currency in Argentina has meant that not only individuals faced their salaries and their income power to drop to one of the lowest figures in Latin America, but also companies (especially utility companies and conglomerates) were forced to start the restructuring processes of the commercial and financial debt that they maintain with the financial institutions that helped them to grow during the last ten years.
The current scenario is dramatically different compared to the devaluation process carried out in Argentina during the late 80s’. For example, at that time, all major utility companies were owned or controlled by the State and the unemployment rate was below 7% (probably sustained by the public employment policy adopted by an oversized and inefficient State at that time) while at present, this rate is close to 25%. Thus, devaluation caused both a higher social and negative economic impact over companies, which are highly indebted outside of Argentina in foreign currency and must cancel their debt with payments collected in local currency.
Notwithstanding, the implementation of those restructuring processes by large companies is getting more difficult than expected, mainly due to the following reasons:
1) Banks (creditors) are experiencing an internal turmoil. The jumpship caused by the late measures taken by the Argentine Central Bank and the Government made that billions of Dollars were driven out of the financial system, leaving banks with scarce resources of money to help those companies out to recompose their financial stability. In addition, the great amount of companies with financial difficulties make it almost impossible to bank’s workout forces to comply with the deadlines imposed by the debtor companies and their business plans.
2) The courts, through a large number of summary proceedings aimed to guarantee the constitutional right of private property, have let individuals to withdraw (against the prohibition stated by law and several decrees enacted by the Government) large sums of money denominated in US Dollars from CDs and money market accounts, forcing banks to give to certain depositors hard currency when at the same time they were receiving national devaluated currency from debtors.
3) Most of the large companies to be restructured are privatized companies with a license to operate a public utility (electricity, gas, oil, communications, etc). As noted above, these companies’ debt is mainly denominated in US Dollars, while the tariffs authorized by the Government have been maintained in national devaluated currency. In addition, the negotiations with the national and some provincial governments to authorize a raise in those tariffs are taking too long. These delays are causing that neither banks nor the companies can determine financial and debt ratios necessary to include in a restructuring proposal. For that reason, most of these companies are entering into standstill agreements with their creditors in order to freeze all judicial actions from either parties for a certain period, which in most cases do not extend more than 180 days.
However, both the central and some provincial governments will not be able to postpone an adjustment of the tariffs for public services any longer, if they want those companies not only to maintain a good standard of service and investment, but also not to file with the courts for reorganization or bankruptcy.
Once new fair rules for the financial market are in place by the Argentine Government, and in particular its Central Bank, opportunities for successful workouts in Argentina shall be facilitated.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.