Why bond investors can't get enough of Argentina
May 11, 2017 |
As the bond boom extends, borrowers are expected to seek financing for energy projects
After an active 2016, Argentine issuers attacked the new year in full force. The government, banks and corporate issuers came to the cross-border bond markets with transactions both traditional and novel, ranging from plain vanilla bonds to global-peso deals and Swiss franc issues.
The surge in deals reflects the fact that most issuers had been frozen out of the market following the country’s 2001 debt default.
“They’ve been playing catch up, especially the sovereign and provinces,” says Nicolas Bendersky, a debt capital markets banker at Citi.
Tierra del Fuego, the smallest province in the country, was among the throng this year. It issued a $200 million bond in early April with a yield of 9.25%. Later in the month, lender Banco Macro set its sights on a rare “global-peso” bond, a $300 million-equivalent deal denominated in local currency and marketed to investors in Europe and the US.
Appetite for even the most esoteric of transactions is fueled by investors’ growing confidence on the country’s economy. S&P Global Ratings lifted the country in April to B from B-, citing its improved economic policy. The agency pointed to advances made by President Mauricio Macri’s center-right administration in resolving large economic imbalances, while restoring the country’s policy credibility.
Despite an economic contraction of 2.3% in 2016, Argentina’s GDP could expand at 3% annually over the next three years, S&P predicts.
As a result, Argentina is gaining a reputation, amid low yields globally, as “one of the good places where you can pick up a great carry,” says Sean Newman, a senior fixed income analyst at Invesco.
Investors are partial to Argentine debt because “it’s a good credit and they don’t have enough of it”, says Diego Ferro, co-chief investment officer at Greylock Capital, who forecasts issuers will keep up the pace of bond sales in the months ahead. By tapping public debt, “issuers can help offset the fact that the economy has taken longer to recover than was expected”.
The heightened number of offerings indicates issuers are already feeling more positive, but a few difficulties have arisen, leaving some observers to wonder if investors are tiring of Argentine risk.
For example, La Rioja targeted green bond investors, who rarely entertain credits below investment grade. To get its B/B- paper to market, the province had to settle for a 10% yield, above the 9.625% yield that sources originally told LatinFinance that it had anticipated. “The yields reflected the fact it is a lower quality province, with some risky characteristics,” said Jason Trujillo, a senior analyst at Invesco, at the time of the offering.
Meanwhile, the secondary market in provincial debt has not yet caught up with the pace of new bond sales. Investors tend to rotate from one provincial issue to another, says Lisandro Miguens, head of Latin American debt capital markets for JPMorgan. “When a new province is issuing, other provincial debt tends to suffer a bit in the secondary market as investors go for the new debt.”
Meanwhile, Argentina’s B3/B/B sovereign debt rating caps potential grades for the country’s corporate borrowers, notes Samuel Bevan, a credit research analyst at Aberdeen Asset Management.
“If they were based anywhere else, some of the corporate issues could be rated higher by some standards,” he says.
Tarjeta Naranja is a case in point. The firm is Argentina’s leading credit card issuer, with 207 branches and a 16.5% market share. Yet Moody’s highlighted the weight of the sovereign ceiling in late March when it rated Tarjeta Naranja’s $250 million-equivalent global-peso transaction.
“Naranja’s ratings are constrained by Argentina’s operating environment, which remains challenging despite various market-friendly policy reforms implemented by the new administration,” the ratings agency said.
Investors, though, were handsomely compensated: the five-year bond boasts a 15% coupon.
An October mandate?
Macri’s reforms may be slower to take effect than many would like, but already investors are responding to the government’s moves to cut spending and reduce deficits of the provinces. The changes send the right signal, Ferro says. “The question is whether they can stay over the years to make a transformational change.”
An early indication of Argentina’s embrace of Macri’s policies could come in October, when the country holds legislative elections. “We aren’t overly worried about it, but obviously political risk remains the main risk in Argentina,” says Aberdeen’s Bevan. He does not expect any opposing parties to score a major victory, leaving the current administration with the upper hand.
If Macri's party performs well in the election, it could have a long-term impact by reconfirming a mandate for change, says Miguens.
Indeed, if reform-focused political parties gain seats, investors are likely to become increasingly optimistic about the possibility of Macri’s reelection in 2019. If such parties lose seats, market confidence in the road ahead may wobble.
“If Macri loses his support, we will likely see a bit of fiscal slippage,” says Newman.
Despite the surge in cross-border bond sales from Argentine issuers, the local market holds increasing allure for the country’s borrowers.
“Other than infrastructure there is not much need for large dollar financings, as most of companies’ balance sheets are peso-denominated,” Bendersky says.
In a reflection of that, the government has worked to deepen the local bank and capital markets. A tax amnesty introduced by the Macri administration has encouraged Argentines to repatriate assets held overseas. Argentines were incentivized to bring their cash onshore through tax breaks if they invested in closed-end mutual funds or government bonds for five years.
An influx of fresh cash under this initiative has allowed local banks to hold dollars and lend cheaply, Bendersky adds. By tapping short-term financings of one to two years at 1.5% rates, many businesses are borrowing locally, reducing the need to raise funds in international markets.
For bigger borrowing needs, businesses with peso-denominated balance sheets are also turning to local currency bonds marketed internationally. Investors are drawn to the offerings due to the high interest rates, with coupons deep into double digits, and Argentina’s declining inflation rates, Miguens says.
A rosy three-month horizon
Bankers are confident that bond sales will continue through the middle of the year. Issuers including Banco Macro and the province of Santa Cruz were in the pipeline as of late April.
“The pipeline continues to be very robust and we have a lot of deals coming in the next couple of months,” says Miguens.
Indeed, official forecasts indicate that the surge of bond sales out of Argentina has much further to run.
“The government has forecast between $4 billion and $5 billion in corporate issuance for the year, and about half of that has been done,” Bevan says.
Now that the sovereign, provinces and better-known corporate names have paved the way, investors can look forward to deals from lesser-known companies, Newman says.
Bankers and investors expect heightened activity from utility companies and banks.
Several energy companies are eyeing their chances to issue. One, Central Puerto, said in September that it planned to issue up to $1 billion in debt.
Already, energy deals are finding a market. Genneia, a renewables company, raised $350 million for a project to expand wind power facilities in Argentina. Stoneway Capital, a power generator part-owned by Siemens, raised $500 million to construct four new thermal-powered projects in Buenos Aires province, valued at $637 million and with a combined capacity of 686 MW.
The list goes on. As Argentina seeks to renew its energy infrastructure, which has been starved of capital for over a decade, many corporates in the area have sought funding from the capital markets.
”Almost all corporate issuance has been in the energy sector,” Miguens says.
More project-specific deals, such as Stoneway’s, may come to the market now, predicts Peter Wietrak, an emerging markets credit analyst at Invesco.
“High quality companies can always come to the market, but later this year you will see more utility companies, given the objectives of the Argentine government to auction off more power generation projects,” he says.
Those auctions may spur more borrowers into the capital markets, says Aberdeen's Bevan.
But there are limits on how long the run of new bond sales will continue. Indeed, many see a deadline looming in the northern hemisphere's summer.
“Most of the activity will happen before the summer,” Bendersky adds. “By the fall, issuers and investors will be monitoring the Argentine legislative elections.” LF