How did Argentina pull off a $16.5bn bond sale?
Investors who scrambled to buy bonds now confront lists of major risks
After more than a decade in limbo, Argentina and its new, reforming president Mauricio Macri have been given the red carpet treatment by global bond investors.
With orders reaching almost $70bn, the Latin American country sealed the largest ever bond issue from an emerging market economy on Tuesday, with a $16.5bn sale of government debt.
Enthusiasm has been absent over the past two years from Latin American borrowers, as a rout in commodities and the prospect of higher interest rates in the US turned bondholders off a continent that was once highly favoured.
Robust demand is even more striking given the country’s economic woes and troubled history as a borrower. Since independence in the 19th century, Argentina has defaulted on government debt eight times, most recently in 2014.
No matter such a troubled history of paying back its debts, Argentina’s first sovereign sale in over 15 years, provided the kind of yield that easily attracted investors, soothed by the belief that the country’s new president can turn round its fortunes.
“It is hard to resist a country that returns to markets with an attractive yield, no matter what has happened in the past,” says Gabriel Sterne at Oxford Economics. “It was the same with Greece. Even investors who had been burnt by the country’s restructuring bought its new debt — albeit through gritted teeth.”
As soon as Argentina’s former President Cristina Fernández de Kirchner’s populist government was replaced in December by the business-friendly Macriadministration, global investors have eyed Argentina as a potential new investment.
The 10-year debt sold with a yield of 7.5 per cent was deemed sufficiently attractive to overcome the economic problems and poor repayment history, particularly against a backdrop of negative bond yields in Japan and Europe. As the scale of orders swelled, Argentina aggressively tightened terms.
And while JPMorgan has not yet said whether the new bonds will be included in its influential index of emerging market government bonds, investors have high hopes. Inclusion would mean new buyers from the index-tracking universe of passive investment.
By the time the underwriting banks had closed their books on the sale, nearly 750 accounts had placed a combined 2,000 orders for the four bond maturities. All up, Argentina was able to borrow at interest rates significantly lower than emerging market countries with similar credit ratings, according to Barclays. The new bonds also priced with a yield below El Salvador, which carries a higher credit rating.
The average yield for five-year bonds issued by comparable borrowers is 7.51 per cent, while Argentina sold its five-year bonds at a yield of 6.875 per cent.
Longer-dated 30-year bonds priced with a yield of 8 per cent, at a discount of 95.76 cents on the dollar, down from an 8.85 per cent yield initially indicated.
US buyers were considered the base of the deal, but buyers stretched beyond dedicated emerging market funds, with US high-yield portfolios and distressed investors participating in the offering, according to a banker involved in the sale.
There was also very “strong participation” from insurance funds, hedge funds and pension funds as well as “a few” sovereign wealth funds which purchased new Argentine debt. Europe and Latin America also showed “strong demand”, the banker added.
The economic challenge facing Argentina remains daunting. The new government in Buenos Aires has been in power for less than six months and faces a litany of issues including inflation at 35 per cent and a deep recession in its largest trading partner,Brazil.
The reforms that Mr Macri has put in place to address these problems, including floating the peso to make exports more competitive and cutting back subsidies of electricity, water, gas and transport, have been painful for citizens.
As Sean Newman, a fund manager at Invesco who bought the bonds, put it: “Now the real work starts.”
The government hopes that returning to capital markets will lead to a surge of foreign investment and a pipeline of new deals by domestic companies using the new debt as a benchmark to price its own bonds.
Dennis Eisele, head of Deutsche Bank’s emerging market syndicate, says that Argentina’s sale of debt will “pave the way for some” of the country’s higher-quality companies to follow suit.
The question is whether this investment will arrive in time.
“It is easy to be fashionable for Argentina right now,” says Mike Conelius, a portfolio manager with T Rowe Price. “The longer-term concern is whether the politics stand in the way of the deeper reforms they need to do.”
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