Monday, April 25, 2016

Gov’t doesn’t rule out new bond issue in 2016

Finance Secretary Luis Caputo led negotiations with holdouts in New York earlier this year.

Finance Secretary Caputo says country could tap global markets again if conditions are right

President Mauricio Macri’s Economic Cabinet is not ruling out a new international bond issue this year, despite comments made earlier last week by Finance Minister Alfonso Prat-Gay about the US$16.5 billion bond sale last Tuesday hopefully being the last of 2016.

The government still needs more cash loans to comply with its goal of drastically reducing money printing. According to Secretary of Finance Luis Caputo, they will be able to finance the Treasury’s deficit — which is currently calculated at 4.8 percent of GDP — through local markets, new multilateral lending and in a “diminishing degree” through the printing press.

But, in an interview with Reuters, he declined to rule out another tap this year to pre-fund the country’s budget in 2017, when the government hopes to cut the deficit to 3.3% of GDP.

“If down the road we notice through investor queries that demand remains high, and the price is right, we would pre-fund,” Caputo said.

With its first bond deal in 15 years, Argentina raised enough to pay the approximately US$9.3 billion owed to holdout investors last week and still had plenty of funds to spare.

But according to experts consulted by the Herald, the remaining US$6 billion will still not be enough to finance the deficit.

“The government needed 25 to 30 billion dollars in loans to finance its debts this year. They got 15 now, but they will need more be it in dollars or pesos,” Proficio Investment’s Rafael di Giorno told the Herald. “The government’s idea was always to avoid making many debt issuances per year, because if you do one shortly after the other the other then the investors that bought first risk suffering losses as their price can fall in secondary markets.”

Caputo said the government would prioritize developing local markets, but didn’t rule out any possibility. “We will be very active in managing our liabilities, trying to achieve the most cost savings,” he said.

The ‘Macri bond’

With US$69 billion in demand, Argentina was able to convince more than enough investors to reach its basic goals this week, as many still had doubts about whether the country would raise enough money to pay for the holdouts at rates below eight percent.

But although the debt issuance was generally seen as a success, the government had to re-arrange some details at the last minute.

One of them was adding a short-dated but cheaper 2019 bond series at the last minute that investors dubbed the “Macri” bond” because they mature within the first term of the new president.

The short-dated tranche helped soothe the nerves of some investors worried about the country’s history of political uncertainty, not to mention bond defaults.

Non-Peronist presidents such as Macri, they reasoned, have struggled to stay in power very long.

With Let’s Change lacking a majority in Congress, where he had to work hard to win approval for the deal with the holdout creditors that paved the way for the new bond issue, and the country still far from social and economic stability, risks were still high for a long-term bond, investors reasoned, thinking the pro-market turn of Macri could not be banked on beyond 2019.

“(The shorter-dated) bonds are a way for some people to re-engage cautiously and capture some carry and income,” said Pierre-Yves Bareau, global head of EM debt at JP Morgan Asset Management.

Carl Shepherd, a portfolio manager at BNY Mellon, stayed out of the deal altogether.

“Macri has a lot of support at the minute, but when you are making such wide-reaching reforms, you can’t please everyone,” he said. “There are no shortage of firebrand politicians who will promise a moon on a stick.”

According to Caputo, the short-term bond had a more technical explanation. “It suited our interest by spreading demand more efficiently along the curve and allowed us to scale back the initial size we had in mind for the 30-year,” Caputo said. He said that decision “reflects our confidence that Argentina spreads are on a declining path.”

Overall the government achieved a weighted average yield of 7.2 percent, or an average coupon of 7.14 percent across the four tranches.

The deal had Deutsche Bank, HSBC, JP Morgan and Santander as global coordinators, as well as BBVA, Citigroup and UBS as joint books.

Demand for more

Still, Macri has clearly restored some confidence with his determination to instill market reforms — and that has given the new bonds a boost in secondary trading.

Frenzied buying from accounts either unable to participate in Tuesday’s trade or those who received small allocations sent secondary prices soaring this week.

This included some offshore money that had left Argentina under the prior administration, with private banking accounts comprising over US$10 billion of the order book, one banker said.

“People want to be associated with a trade that is migrating from populism to more sensible economic policies,” he said.

That means that Macri is likely to find people willing to loan him more money if he ventures into global capital markets again this year, with interest rates still expensive in the regional comparison but less so than in the first bond issue.

Paying litigant investors in cash raised in the capital markets — rather than through longer-term bonds — was risky but saved the country more than US$2 billion, said Caputo.

“Negotiating a price of a potential payment in kind would have extended negotiations and inflated the interest bill,” he said.

“We knew we would be able to place the new bonds at a much better price than what holdouts were willing to pay for them.”

Herald with Reuters