Wednesday, April 20, 2016

Prat-Gay: bond deal brings end to ‘horrible inheritance’

By Ignacio Portes
Herald Staff

Minister says record debt issuance marks end of tough first few months of administration

Argentina issued a record US$16.5 billion in debt to international investors yesterday to finance the cash payment to the so-called “vulture” funds, ending the decade-long conflict.

The country sold US$1.5 billion more than the US$15 billion originally targeted, at an average interest rate of 7.14 percent, markedly higher than neighbours such as Uruguay, Bolivia and Chile but also below the pre-settlement nine percent rates that the country was offered in 2015.

The larger sale and the cut in rates were aided by offers which surpassed expectations, reaching US$68 billion according to the official figures.

“We could have sold twice the bonds,” Finance Minister Alfonso Prat-Gay boasted while announcing the news in a press conference. “This is the biggest demand ever seen for a bond or stock offered by an emerging market government or company, and probably one of the 20 biggest in the world generally.”

While the largest part of the proceeds will be used to pay the holders of 2001-defaulted bonds, that sum is estimated to reach only US$11 billion or so after all litigation ends (see Page 7).

The other US$5 billion being raised, the government argued, are authorized by the 2016 Budget law, with Prat-Gay admitting it will be used to finance the country’s fiscal deficit.

The new cash, the minister said, means “we avoid budget cuts or an adjustment through inflation.”

Overall, Argentina sold US$6.5 billion on its 10-year bond, the centerpiece of the offering, at an interest rate of 7.5 percent.

It also sold a US$ 2.75 billion three-year bond at 6.2 percent, a US$4.5 billion to be repaid in five years at 6.9 percent and a US$2.75 billion 30-year bond at eight percent, with a 7.6 percent coupon.

Future of debt

The government has repeatedly vowed this would be the sole bond issue of the year, but it also said yesterday’s deal opens the door to cheaper debt issues starting in 2017.

Despite yesterday’s deal, the country still keeps a low debt-to-gross domestic product (GDP) ratio, making future issuances a relatively easy sell too.

According to Prat-Gay, international credit organisms such as the World Bank and the Inter-American Development Bank will now see Argentina as a less risky country, easing the flow of new funds.

He also said that both provinces and “especially” the private sector would now have the opportunity to raise their own debt.

“The credit lines we secured have to be put to work,” he argued, mentioning energy and infrastructure projects as potential sources of increased productivity in order to secure that the money can be paid back.

‘End of first stage’

The minister repeatedly spoke about the deal meaning the end of a first stage for President Mauricio Macri’s administration.

While he refused to describe Macri’s first five months in office as part of an austerity programme, the minister said that period was one of necessary “corrections” to a “horrible inheritance” left by Cristina Fernández de Kirchner’s government.

“We have now made sure that the government’s fiscal and financial goals will be met. In the second stage, the benefits sowed during the first will be ripe for collection,” Prat-Gay told reporters, playing up again the possibility of an economic recovery in the second semester, on which analysts remain sceptical.

His words were in line with Macri’s message to Argentine businessmen on Monday, in what seems to be a coordinated government effort to convey the idea that a more encouraging economy is on the horizon, following months of slowdown, job losses and rising prices.

Invest or lose

Just like Macri yesterday, Prat-Gay also had a message to Argentine businessmen urging them to invest. But the minister added a warning about the potential consequences of not investing, saying they could miss out on profits to quicker foreign funds.

“If the locals don’t invest, those abroad will do it first. During our tour (to sell the bonds), we saw interest to sink capital in productive projects. We are planning a second roadshow, this time focused on equity investment instead of bonds,” Prat Gay said.

Prat-Gay also anticipated part of his future agenda, which he said included stimulus to small- and medium-sized companies, private-public partnerships in investment projects and deals with neighbouring countries.

Markets rise

The news of the deal was celebrated by investors, as the local benchmark stock index Merval rose by five percent, while many Argentine companies trading abroad also soared.

Banco Galicia, Telecom, Cresud and Banco Macro all rose more between four and six percent in New York.

The country risk index, which estimates how much extra interest rates national bonds have to pay when compared to the US, was down again by almost four percent, reaching 388 basis points, its lowest since 2007.

@ignacioportes