t would be the country’s first international debt issuance in more than a decadeSaturday, February 27, 2016
Argentina inches closer to bond return with holdouts deal
By Paul Kilby
NEW YORK — The prospect of a bond sale of up to US$15 billion from Argentina — its first international debt issue in more than a decade — is growing nearer as negotiations with the country’s holdout creditors approach the finish line.
Argentina could come to market as soon as next month with the lifting of a pari passu injunction preventing debt payments and the nearing of a long-sought deal with heavyweight hedge funds Elliott and Aurelius, which have been battling the sovereign in the courts.
Finance Minister Alfonso Prat Gay said this week that Argentina would issue a US$15 billion bond to pay the holdout creditors once the country’s Congress had repealed certain debt laws preventing it from offering them better payment terms.
Nullifying those laws — and the payment of all holdout creditors who agree to Argentina's proposal by February 29 — are conditions for lifting the injunction that effectively forced the sovereign to default on its restructured bonds in 2014. That will pave the way for the sovereign’s return to the markets.
“We expect the (repeal of those laws) to happen in the first half of March, and then issuance could happen after that,” said John Baur, a portfolio manager at Boston-based investment management firm Eaton Vance.
Latin America has seen just US$14.8 billion in new supply from five issuers this year, so Argentina’s return to the international bond market after 15 years will be a major event.
A deal of the expected size of Argentina’s return is rare for the region, even in the most bullish of times, and getting a slice of the action will be vital for DCM bankers who have had to content themselves with slim pickings and falling primary volumes.
But can the markets absorb a US$15 billion offering in one fell swoop?
While some have their doubts, many think Argentina’s exceptional circumstances make such a foray possible — even though the buyside has lost its enthusiasm for emerging market credits.
“We have a high degree of confidence that it is doable, assuming you have a stable market,” one debt syndicate banker said. “This is one of the few positive stories in EM.”
Still, the deal would almost certainly have to come in both US dollars and euros with a variety of tenors, and would require a broad sweep of the global investor base as well.
“If they need all the US$15 billion at once, they could do US$10 billion in dollars and US$5 billion in euros,” said Sean Newman, a senior portfolio manager at Invesco. “The market is there, but it would lead to some indigestion.”
In addition, once the sovereign has market access, it is expected to go back for more as it seeks to plug the country's large fiscal gap. Other Argentine borrowers are also likely to follow in its footsteps.
“There will be a lot of supply coming out of Argentina, and that is where it gets challenging for investors to digest the supply,” said Baur at Eaton Vance.
“The flip side is that they are starting from very low levels of debt and there is a lot of room for the government to expand the amount of debt. That is one of the reasons I would look at (the bond issue).”
In fact, the size of the deal may help, as it will give the country significant weighting in debt indices and will force accounts to sit up and listen.
“If the larger asset managers are underweight Argentina, there could be billions of dollars on the sidelines,” said a hedge fund lawyer.
And in the end the trade may simply be too tempting to resist, especially given that Argentina will have to pay up if it wants to keep investors satisfied and sell more deals later on down the road.
PREPARING FOR PREMIUMS
Despite its rising credit profile, Argentina will likely have to pay a premium to Brazil, which has now fallen fully into junk territory.
Some investors think an Argentina 10-year bond should come as high as eight percent or more, while Brazil’s benchmark 2025s are being quoted at 6.5 percent.
“If it comes at eight percent, I would definitively look at the transaction carefully,” said Newman. “Argentina is still not out of the woods. People will turn their lenses on inflation and fiscal reform. You can't ignore these things, and that is why you need to price at the high end.”