How did Argentina pull off a 100-year bond sale?

Despite past defaults, the Latin American country has sold debt maturing in a century

by: Benedict Mander and Robin Wigglesworth

Mauricio Macri

Little more than a year since Argentina’s return to the capital markets with a record-breaking $16bn issue, it pushed the boundaries even further on Monday by selling a 100-year bond.

This makes the market-friendly government of Mauricio Macri only the second Latin American sovereign to issue a so-called “century bond”, after Mexico in 2010. But such a long-maturity bond sale from a seemingly perennially troubled country raises a host of questions.

Why were there buyers?

Argentina would probably never have made such a bold move without knowing that some investors were already interested, analysts said. “There has to be some big real money player behind this,” said Alejo Costa, chief strategist at BTG Pactual in Buenos Aires.
Adam Bothamley, head of debt syndicate for HSBC, one of the banks that worked on the deal, said it came in response to “reverse inquiries”, where investors approach the issuer with a proposal that will meet its needs and theirs. This worked well for Argentina last year with its massively oversubscribed sale of local currency debt with long maturities.

Why 100 years?
Mr Costa explained that long-duration bonds are the best way for real money investors to place bets on Argentina, given that they are unable to leverage themselves like a more nimble hedge fund. “If you are an investor with a constructive view on Argentina, what you want is duration,” he said.

Argentina sold $2.75bn of the debt with a coupon of 7.125 per cent, equating to an annual yield of 7.9 per cent, according to a statement from the Argentine finance ministry late on Monday. The bond attracted $9.75bn in orders from investors.

If Argentina fulfils its promises to reduce its deficit, meeting its fiscal targets, there is a good chance that Argentine bond prices will rally significantly over the next couple of years. Given the bond was sold at a yield of almost 8 per cent an investor would recoup their initial investment in around 12 years.

Yields could fall by at least 150 basis points, moving more in line with other major economies in the region such as Brazil — implying capital gains on such bonds in the double digits. “Those are pretty good returns. At a rate of 8 per cent or higher, it’s a buy,” Mr Costa said.

Still sounds a bit risky given Argentina’s history as a defaulter?
Argentina has defaulted on its sovereign debt eight times since independence in 1816, spectacularly so in 2001 on $100bn of bonds — at the time the world’s largest default — and most recently in 2014 after clashing with Elliott Management, an aggressive hedge fund.

But Mr Macri’s government “cured” the latest default in 2016, and times have changed, said Joe Harper, a partner at Explorador Capital Management, an investment fund focused on Latin America.

“The policy pendulum in Argentina has shifted to the centre, and the country’s next 100 years will be very different than the last century.”

Few investors are looking that far into the future; most look little further than the next couple of years. Over that period, few are expecting any major upsets in Argentina. The worst that could happen is that Mr Macri’s government disappoints and fails to win a second term. But even then, few envisage a return — in the next elections, at least — to the kind of populism that has been at the root of most of Argentina’s defaults.

But hasn’t Argentina borrowed a lot over the past year?
Yes, but that was always the plan. There was no way out of the inflationary trap it was stuck in — with the central bank printing money on demand for the Treasury — than for the government to finance itself instead on the international capital markets.

Luckily, foreign debt was low when Mr Macri took power as the previous government had been unable to borrow abroad. Most analysts argue that Argentina’s debt-to-GDP ratio is still very sustainable, provided that the government keeps to its fiscal consolidation targets and the economy grows. This year, Argentina has already borrowed about $9.5bn, and is set to borrow another $5bn or so more. The sooner it can cover its needs for 2017, with midterm elections approaching in October, the better.

What does this say more broadly about emerging market and investor appetite?

International investors have not tired of emerging markets just yet. Billions have flowed into bonds issued by the developing world in 2017, with investors hungry for the higher yields on offer and undeterred by the US central bank’s programme of interest rate increases.

“Appetite for emerging markets is rising in a new era of hard-to-find value,” said Mr Harper. For Latin America in particular, growth would continue to be fuelled by demographic trends found in few other regions in the world.

And while the liquidity and inflows remain, Argentina is one of the few opportunities left, said Mr Costa, who pointed also to Ukraine and perhaps Brazil. “Argentina is one of the few constructive stories,” he added.

Should we be worried that this is a sign of froth?

Emerging markets have enjoyed a tremendous year so far, countering fears that the ascent of Donald Trump would usher in trade wars, geopolitical strife and aggressive monetary tightening in the US — all ill omens for the developing world.

But the strength of the rally, coupled by being driven primarily by inflows into mutual funds and exchange traded funds, has sparked concerns in some quarters about when the tide goes out again, as it invariably does.

Markets are riddled with deals that in retrospect signalled a top, such as Time Warner’s 2000 merger with AOL, or Rwanda’s ebulliently received $400m bond sale just before the Fed began to trim its quantitative easing programme in 2013, which triggered a “taper tantrum” in emerging markets.

Argentina’s prospects may have brightened considerably, but sceptics point out that the country has spent a lot of its post-independence life in default on various debts.

Investors buying a 100-year bond issued by Buenos Aires are making a risky bet that this time things are going to be different.

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