As all dollar-linked bonds, this Bonad 2017 series is denominated in local currency, in this case Argentine pesos, but adjusted to whatever the official exchange rate happens to be at the moment of maturity.

Wednesday, August 19, 2015

Argentina sells US$1B in dollar-linked bonds

Auction draws fewer bids than the amount offered; investors will be paid interest twice a year

The Economy Ministry yesterday sold US$1.09 billion worth of dollar-linked bonds, in an auction that drew fewer bids than the amount of debt on offer.

Although the government had initially indicated it would sell US$500 million of the Bonad 17 bonds, yesterday’s official gazette said it would seek bids for up to US$1.5 billion of the notes.

In the end, less than that was offered by investors, US$1.38 billion in total, of which the government took slightly more than a billion.

The bonds will be redeemed in pesos in 2017, and will be governed by Argentine law, paying an interest rate of 0.75 percent plus however much the peso depreciates during that time.

As all dollar-linked bonds, this Bonad 2017 series is denominated in local currency, in this case Argentine pesos, but adjusted to whatever the official exchange rate happens to be at the moment of maturity.

Investors in the bonds will be paid interest twice a year, on February 22 and August 22, until maturity in February 2017.

The City and Province of Buenos Aires, Chubut, Neuquén, Chaco, Mendoza, Formosa and Entre Ríos have also issued this kind of bond over the past few years, as has the national government.

Relief for black markets

The sale means that the government is closer to finding resources to pay back more than US$3 billion in dollar-denominated debt that matures this year, as well as covering for the increased state expenses this year. It does so without incurring in more complicated debt issues outside the country, which can be made more difficult by attempts from so-called “vulture” funds to block them.

It will also mean that investors chasing dollar-denominated assets will now have a new alternative to the black-market dollar, which has seen increased demand in the last weeks.

According to economist Eduardo Levy Yeyati, this will be seen as “a good option” for this kind of investors, as “the bonds cover your back whatever happens. If there’s a big devaluation after the election, the bond repays you more, and if there’s not it is still quite convenient. It is likely to yield returns above inflation rates in any case,” he argued.

The auction means there is now a slightly higher supply of dollar-denominated assets, giving the circulating pesos of people looking to save money another investment alternative on top of the fixed-term peso deposits which have seen their interest rates improved lately.

Although the sale was not as strong as the Treasury had hoped for, that could be a factor in the supply and demand game at both the legal and underground currency markets.

Herald with Reuters