Largest bond sale in Latin America since 2013Saturday, March 5, 2016
Banks pin hopes on US$15 billion Argentina bond issuance
By Paul Kilby
NEW YORK — Bankers struggling to make a living in a waning Latin American primary market are counting on a surge of bond issuance from Argentina after the country cut a historic deal with principal holdouts this week.
Argentina has turned into the new stomping ground for DCM bankers scouring the region for business as the country emerges from a near 15-year isolation brought on by its 2001 default.
This week’s agreement between the country and Elliott Management effectively marks an end to the bitter debt dispute and paves the way for the sovereign's first bond in 15 years.
Barring any objections from Congress, the republic is now likely to issue up to US$15bn of bonds starting as soon as April in an effort to pay litigant investors.
A deal this size would make it the largest bond offering ever from an emerging markets borrower, putting it ahead Brazilian oil firm Petrobras’ US$11 billion in 2013, according to Thomson Reuters data.
More Argentina supply is likely to follow as the government seeks tens of billions of dollars to plug the country’s growing fiscal gap.
A string of provinces are also preparing international bond sales led by Buenos Aires, which has already kicked off European and US roadshows through Citigroup, HSBC and JP Morgan.
Also lining up are corporates such as real-estate firm IRSA, oil company YPF and perhaps utility Pampa Energia, as it seeks to fund the acquisition of a stake in Petrobras Brazil.
MUSIC TO THE EARS
All this is music to the ears of bankers toiling to generate mandates in a region where dollar funding has lost its allure amid FX volatility, slower growth and a deepening political and economic crisis in Brazil.
In some ways, Argentina will be returning to a market similar to the one it last tapped in 2001, when total primary bond volumes for the year reached just US$40 billion.
After enjoying a Latin American bond bonanza that saw yearly volumes peak at US$138.75 billion in 2014, bankers are now having to accustom themselves to slimmer pickings.
Deal flow plummeted to US$70 billion last year and DCM executives hold out little hope for a rebound — at least in the near term.
“This is the worst I have seen it since 1998 — much worse than 2008,” said a veteran DCM banker. “We have a pipeline but it isn't nearly what it was last year. The only thing that is vastly different from before is Argentina.”
DCM activity in Argentina — which was once a major fee generator — may help bolster shrinking bond fee wallets which, according to Thomson Reuters/Freeman Consulting, fell to US$252.21 million last year from US$676.39 million in 2014, and stand at just US$25.10 million so far this year.
It remains to be seen whether Argentina can fill even a portion of the gap left over from Brazil, where cross-border bond sales have ground to a halt. But this hasn't stopped bankers from trying.
BBVA, Citigroup, Deutsche Bank, HSBC, JP Morgan and UBS reportedly extended a US$5 billion bridge loan to help the new administration of President Mauricio Macri bolster dwindling reserves earlier this year, putting them in pole position for future sovereign mandates.
The move underscores the importance of Argentina for certain financial institutions, even as many of them beat a broader retreat from the region.
Citigroup plans to sell its retail business in Argentina, but participation in the loan may indicate a willingness to mend fences with the new government after its spat with the previous administration over processing interest payments.
Deutsche Bank, meanwhile, has also seen value in dedicating resources to capital markets transactions in Argentina, despite recently closing down operations there and in other Latin American countries.
Clinching mandates on sovereign and other deals in Argentina could make a large dent in the P&L statements of LatAm DCM departments this year.
A US$15 billion transaction from the sovereign would quickly double the US$15.4 billion in new supply seen from Latin American borrowers in the year to-date, and propel lead banks to the top of the league tables.
“(The sovereign deal) is pretty important,” said a syndicate banker. “It gives big league table credit and there are obviously fees.”
The large sum alone should mean a big payout for banks involved, though questions remain over the size of fees to be charged to a junk-rated sovereign long absent from the markets.
“I don’t think it will be in the single digits,” said a DCM banker. “They have to pay if they want to get the job done. It is not a matter of showing up and putting a 1bp-2bp fee on it.”
The region’s more sophisticated public credit departments, such as in Colombia and Mexico, have been content to pay anywhere between 14bp and 25bp on recent dollar and euro transactions, and Argentina is expected to be no different.
Even at the low end of that range, the payout on an up to US$15bn bond offering should be more satisfactory even when shared among competitors.