Saturday, April 16, 2016
Seven top banks named to issue debt
Finance Minister Alfonso Prat-Gay gives a lecture at Georgetown University in Washington DC this week.
Seven banks will manage the US$15 billion issuance, earning up to US$27 million
NEW YORK — The stakes are high for Argentina as it prepares to price its first international bond next week in 15 years — a deal that could end up as the largest emerging-markets trade ever.
The country is looking to raise as much as US$15 billion in new debt to pay litigant investors and bring a long-running battle in US courts to an end.
A deal of that size is ambitious for any borrower at any time, not to mention a country with a struggling economy a government that is just coming out of default.
“We have had no precedent for this in emerging markets,” Bianca Taylor, a senior sovereign analyst at Loomis Sayles, said. “A sovereign has never come with US$15 billion at once.”
Seven banks are in on the trade: global coordinators Deutsche Bank, HSBC, JP Morgan and Santander along with joint books BBVA, Citigroup and UBS. Underwriters could be paid a total of US$27 million for their efforts if the size reaches US$15 billion.
Deutsche Bank, HSBC, JP Morgan and Santander will recieve each 19 percent of the total fee pool, or between US$4.2 million and US$5.1 million, based on the expected size issue. Meanwhile, BBVA, Citigroup and UBS will get eight percent of the fee pool each, or between US$1.8 million and US$2.1 million.
Government officials highlighted that the commisions are lower than the ones paid in the 2005 debt swap, which were at 0.55 percent.
All seven banks will have to pull out the stops in order to even cover a US$15 billion offering two times — and hit Argentina's average yield target of 7.5 percent. Banks will be turning to dedicated emerging markets accounts and crossover buyers worldwide as it drums up interest for the deal's five, 10 and 30-year tranches.
Smaller retail tickets are also likely to be included to capture the deep pockets of Latin American offshore money.
“That is the single biggest risk out there,” said one US-based investor. “That there is not enough demand.”
To avoid any future problems, the bonds will include collective action clauses (CACs), which typically spell out that any restructuring can go ahead with a 75-percent approval from investors, binding any dissenting creditors in the process. The lack of them are the main reason behind Argentina’s lock down from international markets.
Argentina hired McGraw Hill Financial Inc’s Standard & Poor’s Rating Services for the bond issue because it was the only one of the major three credit ratings agencies that would sign a contract under Argentine law.
The national government will recieve the funds from the debt issuance next Friday and pay the holdout funds on the same day. That would put an end to the injunctions issued by United States Judge Thomas Griesa against Argentina.
The administration of President Mauricio Macri made ending the standoff with the country’s holdout creditors a priority after taking office in December.
His market-friendly approach has bolstered market confidence in the country and offered a bright spot in what has been a difficult year so far in the emerging markets space.
“There is pent-up hunger for positive stories,” said Chia Liang, head of emerging markets investments at Western Asset Management, who attended a roadshow for the deal this week.
Holdout creditors will get first dibs on proceeds of the new bond, Argentina's first in the international markets since the 2001 default that began many of the country’s current woes.
Argentina is scheduled to make past due interest payments and has concluded agreements with its litigant creditors — all moves needed to clear its way to sell new debt.
But some accounts will be unable to buy a credit that is still rated B3 by Moody’s and remains in selective default by S&P.
And while Argentina’s increased weighting in the JP Morgan indices should encourage index investors to participate in next week’s trade, the bid may not be as strong as anticipated.
That is because the country’s Global 2017 will be rolled off all the relevant EMBI indices, said a New York-based investor.
Even if buyside interest is strong, however, many say that Argentina may nevertheless struggle to get a new 10-year deal over the line at the average 7.5 percent yield it hopes to pay across all three tranches.
With a rocky default history behind it — and complicated economic challenges still ahead — the sovereign may find investors drawing a line in the sand at the eight percent level.
“They don't have any GDP or inflation statistics, and they don't have a financing plan,” said Taylor at Loomis Sayles. “They are playing it by ear.”
Yet the sovereign still might be able to grind yields relatively tighter if it can convince enough investors that it will soon return to Single B ratings territory.
Even under eight percent, some say, Argentina will look appealing.
“The spread to Brazil and other comparables is significant,” the US-based investor said.
Brazil’s 2026s (rated Ba2/BB/BB+) are now trading at around 5.55 percent, against mid seven percent to eight percent area on Argentina’s local law Bonar 2024s and 2027s.
Other comparables are Sri Lanka’s 6.125 percent 2025 (B1/B+/B+) at around 7 percent, Pakistan’s 8.25 percent 2025 (B3/B-/B-) at 7.30-7.20 percent and the Dominican Repulic’s 6.875 percent 2026 (B1/BB-/B+) at 5.875 percent-5.75 percent.
“If you think Argentina will be 100bp tighter over the next few months,” the investor said, “I don’t think it will make a difference (if it comes below eight percent).”
Herald with Reuters