The Strategist

A marketing exercise or restoration of confidence? Argentina issued 100-year bonds for $ 2.75 billion

06/21/2017 - 10:20

Argentina issued bonds for $ 2.75 billion with a maturity of 100 years, taking advantage of the increased demand for high yield securities. Despite the skepticism of some analysts and frequent defaults in the country, demand was high, as high yield over a long period is what the market is currently lacking. However, a number of experts believe that this was only an advertising move to attract investors' attention to other issues of Argentine bonds.

Finizio via flickr
Finizio via flickr
On Monday, June 19, the authorities of Argentina issued international bonds for a period of 100 years for a total of $ 2.75 billion. The placement was organized by Citibank and HSBC, the interest rate on the bonds was 7,125%, the yield - 7,92%, the country’s Ministry of Finance says.

Thus, the second largest economy of South America joined the peculiar club of long-term borrowers: securities with a maturity of 100 years were previously issued in the UK, Ireland and Mexico.

Such bonds are particularly attractive for insurance and pension funds seeking to fix long-term income. Argentina, in turn, will be able to use extremely low loan costs to finance the budget and repay debts on previous bonds, which will be formed in the next few years.

"Having restored confidence in Argentina and the future of our economy, the government was able to sell the bonds," said Finance Minister Luis Caputo.

The Argentine government made an impressive maneuver in the capital markets a year after ending a longstanding dispute with creditors over the default of 2001. The authorities issued a record amount of debt for a country with an emerging market (it was about $ 16.5 billion). To compare, Saudi Arabia was able to attract $ 17.5 billion in October 2016.

According to Guido Chamorro, a senior investment manager of Pictet Asset Management Limited in London, the country enjoys an increase in demand for high-yield bonds in the context of lower interest rates in developed countries. Sale of securities with such a long maturity may be part of a marketing strategy aimed at drawing attention to other proposals of Argentina. "It's about free advertising. In the end, they were on the front page of the Financial Times", says Chamorro.

However, some investors were worried that the proposed yield on the new issue was too low, given how little time has passed since the country once again failed to fulfill its obligations. "But the market has a short memory. The transaction itself does not bother me, but some tension causes a narrowing of the spread (the difference between the best buying and selling prices) for multi-year bonds of emerging markets", says Victor Fu, director of emerging markets strategy at Stifel Nicolaus & Co.

Over the past 200 years, Argentina has defaulted on obligations seven times, three of them occurred over the past 23 years.

During the talks that lasted more than a decade following the financial crisis of 2001, the government of then-President Cristina Fernández de Kirchner irritated US judge Thomas Griesa so much that he called Argentina "an absolutely unruly debtor," Bloomberg notes.

The country’s international credit rating is not too impressive, although it is quite stable: S&P awarded Argentina a rating of B, Moody's - B3, Fitch - B.

"It is terribly premature for Argentina to issue 100-year bonds. If you go back to history, I'm not sure that we can find a 20-year period when Argentina did not default", says Puma Investments’ CEO Jorge Piedrahita, who said he would "look at these bonds from the outside".

Nevertheless, according to some analysts, Argentina would probably never have decided on such a bold move, not having confidence that some investors are already interested. "This was due to some great player and real money", says Alejo Costa, chief strategist at BTG Pactual.

Prior to the issuance of 100-year bonds, the government issued securities in US dollars and Swiss francs for a total of about $ 7.5 billion under a financial plan that involved foreign borrowing of $ 10 billion to cover a budget deficit of 4.2% of GDP.

However, on June 19, Luis Caputo announced that the borrowing ceiling was increased to $ 12.65 billion, thus leaving Argentina a chance for at least one bond issue. It is assumed that new securities will be issued in peso and euro.

Only few investors look to the future further than the next couple of years. During this period, almost no one expects serious upheaval in Argentina. The worst scenario is disappointment with Macri’s government and the inability to re-election for a second term, notes the Financial Times. However, even in this case, it is unlikely that the potential change of the current team in the next election will return to populism, which, in fact, was the cause of most of Argentina's defaults.