Tuesday, April 19, 2016

Gov’t cashes in as markets grab bonds

Buenos Aires Stock Exchange’s benchmark Merval index was stable yesterday despite the news.

International credit tapped for first time in 15 years, with offers four times greater than targets

The government comfortably secured the funding it needs to underwrite its economic plans for the year yesterday, after the country received offers worth more than four times the amount it was looking for in its massive dollar-denominated bond sale, following its deal with the so-called “vulture” funds.

The country amassed more than US$65 billion in orders for its first international bond in 15 years, an enthusiastic welcome back from sovereign debt creditors that will bring a sigh of relief to President Mauricio Macri’s administration.

“We’ve finally come out of years of financial conflict with the world,” Macri told local business leaders in a conference at the Olivos presidential residence as figures from the sales emerged.

The high amount of offers will bring fresh hope to the Pink House, which had said there was “no plan B” if a deal with holdouts and a return to debt markets wasn’t pushed through.

Finance Minister Alfonso Prat-Gay had argued that large-scale austerity measures would have to be implemented if their financial plan did not materialize, but that he was opposed to such a move.

Litigant bondholders who rejected the terms of Argentina’s debt restructuring and filed suit for a better payoff will have first dibs on the proceeds of the transaction.

The Economy Ministry estimates that slightly more than US$10 billion of the bond issue could end up being used to pay those holdouts, while the remaining cash, they argue, will be set aside to finance infrastructure projects, while also helping address the country’s fiscal deficit without resorting to money printing.

With the sale expected to take place today, the large number of offers could also mean that the country is on track to get a slightly cheaper interest rate than it was initially targeting, as it could pass on the most expensive proposals it received.

Rates of around seven percent would still mean, however, that the country is paying one of the highest returns to investors in the world among sovereign nations, a fact which helped pave the way for the high demand, as most other investments around the world offer lower yields.

Deutsche Bank, HSBC, JP Morgan and Santander are acting as global coordinators on the bond sale, while BBVA, Citigroup and UBS are joint bookrunners.

The sale will be completed today after the government decides which offers it accepts.

Enough creditors

on board

With the bond sale such a central part of his economic programme, the Economy Minister led a roadshow across the West’s main financial hubs to convince investors of the attractiveness of Argentina’s first debt issue in 15 years.

In the end, there were more than enough creditors on board.

At over US$65 billion, the order book is one of the largest ever seen for an emerging markets bond — even exceeding the US$50 billion book for Brazilian oil firm Petrobras’s US$11 billion six-tranche deal in 2013, according to Reuters data.

Yesterday’s surge of demand for the bond allowed Argentina to set pricing guidance close to its optimistic funding costs for the ground-breaking deal.

The country was able to tighten pricing significantly across most of the four-tranche bond on the back of strong demand.

It set guidance of 7.5 percent-7.6 percent on the 10-year tranche — the centrepiece of the offering — in from initial price thoughts of eight percent area that were given to investors.

While those prices are still more expensive than what most neighbouring countries pay, the trend seems to show that Argentina could eventually reach some of them.

Last month, Brazil secured a US$1.5 billion issue at a 6.1 percent annual interest rate, the most costly issuance in the last seven years, far above the three-to-four percent rates it had got used to.

Some of the offers Argentina received yesterday are only marginally behind those rates.

At the short end of the curve, Argentina’s three-year bond received was set yesterday at 6.25 to 6.5 percent, while the five-year bonds are expected to price below seven percent too in some cases.

The country, however, is still far behind what others in the region pay, with Chile, Peru and Uruguay all getting rates between two and five percent in the last two years.

Market reaction

While markets have been generally positive about Macri’s deal with the holdouts, praising the country’s decision to improve its offer in order to end the legal deadlock blocking the country from normally servicing its debt, Argentina’s Merval benchmark stock index was almost unmoved yesterday, down by 0.3 percent on the day.

But other market signals were positive, with the Argentine peso strengthening by seven cents to 14.49 per dollar, while the country’s JP Morgan country risk indexed plunged by almost five percent to 396 basis points.

Market analysts were also optimistic.

“It is fantastic that Argentina is accessing the market,” said John Baur, a portfolio manager at Eaton Vance. “This is certainly a very important step in the direction of improving the future of Argentina economically.”

The Economy Ministry declined to comment, saying it would wait for the sale to be completed tomorrow.

—Herald staff