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Marcos Wentzel, director at investment bank Puente |
Given the country’s inflation problem, it is all pretty short-term – typical tenors are between 18 and 20 months – but in 2014 there was ARS60,000 billion ($6.9 billion) of corporate and provincial issuance. However, there have been some interesting international transactions so far in 2015 and Marcos Wentzel, director at investment bank Puente, says the financial markets are anticipating the elections at the end of this year, and taking a positive jump ahead of an expected better political environment and GDP growth in 2016.
“Politically this is a transition year and there is a very optimistic view about a change to a more investor-friendly government and we are already seeing small capital inflows into the country,” says Wentzel. “This doesn’t mean that the international markets will simply open up for Argentine companies to issue bonds but YPF’s deal was an interesting example [that Argentine companies are not locked out of the international markets].”
YPF raised $500 million in early February 2015, with a dual tranche transaction led by Citi, JPMorgan and Banco Itaú Argentina. The state-run energy company’s 2018 and 2024 notes were priced to yield 8.5% and 8.95% respectively. A banker who was close to the deal said the company could have raised $1 billion but had chosen to downscale to keep the financing costs within single-digits. The debt certainly is not cheap by international standards, but as Argentina’s dispute with the holdouts on default bonds rumbles on, the ability to raise anything at all was important. The City of Buenos Aires followed closely after YPF, raising $1.7 billion of demand for a $500 million 2021 bond. That deal was priced at par to yield 8.95% and was led by Bank of America Merrill Lynch, HSBC and JPMorgan.
Positive reaction
The positive reaction to these international issues gives weight to Wentzel’s prediction that local paper will re-price in the second half of the year. “We have seen more frontier markets funds and hedge funds buying the more liquid bonds – such as the province of Buenos Aires, the City of Buenos Aires and sovereign bonds,” he says. “You have already seen big hedge funds raising $500 million or $1 billion and because of the liquidity in the market you are going to see a higher value of Argentine financial stocks and bonds in the next semester.”
He believes the financial markets will move faster than the economy. “I think in the second semester you will see a large movement in the price of international Argentine bonds,” he says. “Compared to the yield of bonds from issuers in Uruguay, Peru and Brazil there is still 500bp to 700bp of spread and I think that it will spread by at least two percentage points – maybe three [percentage points].”
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However, one emerging markets-dedicated investor thinks such talk is premature. “Argentina is still a basket case,” he says. “There are deep capital controls – you can’t take your money out – and so it’s a very difficult market to invest in. I don’t know see why you would be bullish on Argentina – you don’t have any particularly strong reason to hold such a view and the issue with the holdouts is still waiting to be resolved.”
Over 90% of the debt issued in the local markets is denominated in local currency but there are some US dollar-indexed transactions. Only companies that have US dollar inflows can issue this as the markets won’t accept the devaluation risks from issuers without the natural access to hard currency.
However, for those that can issue these structures, longer tenors are available – up to 36 months – Wentzel says they pay very low yields, even compared when international rates – at as low as 4%. “The low yields are mainly due to the attractiveness of the structure to investors who cannot buy dollars and so take a position in these bonds as a currency hedge.
The local buyside (insurance companies, mutual funds and private banks) has been growing rapidly in recent years and has injected liquidity into a system than was badly hit when the government nationalized the pension funds in 1993. Anses, as it is called, is still an active investor but its buying decisions are politically motivated and most of its resources flow into public sector-backed initiatives. Secondary trading is reported to be light, not least because the short-term nature of the paper encourages investors to hold to maturity.
However, securitizations of consumer loans and other short-term loans have grown in recent years – which are structured to be AAAs with maturities of less than a year. Total issuance of these structures reached close to ARS25 billion in 2014. Given the restrictions on the financial system the local and international debt capital markets activity is encouraging and augers well for growth under more orthodox macroeconomic policies. However, one economist at an international bank warns that Argentina may be about to open up just as general EM liquidity is drying up.
