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Argentina feeds hungry investors with landmark bond sale

The Latin American sovereign has finally returned to the capital markets, demonstrating that despite some market saturation appetite for the sovereign’s long awaited debt did not dampen.

Apr 20, 2016 // 6:17AM

Argentina sold US$16.5bn worth of bonds in its return to the international capital markets, the largest ever single debt sale from an emerging market.

The sovereign was able to increase the size of its bond and tighten the pricing as a result of huge investor demand for the country’s notes, which reached US$68.6bn.

“The issuance went very well for the sovereign, evident from the high levels of demand against the amount of the sale,” said Greg Saichin, Chief Investment Officer, Global Emerging Markets Fixed Income at Allianz Global Investors.

The total sale amounted to US$2.75bn of 3 year bonds yielding 6.25%, US$4.5bn of 5 year notes with a yield of 6.875%, US$6.5bn of 10 year paper to yield 7.5% and US$2.75bn worth of 30 year bonds with an 8% yield.

Saichin noted that the yield on the sovereign’s 10 year paper was notably lower than expectations, which were over 8%.

According to Bloomberg, the average yield on similar 10 year noted with a B- rating is 8.89%, demonstrating the sovereign’s ability to tighten pricing amid large demand.

“The country is trading at the BB- level, and not at the B- level it is currently rated,” stated Saichin.

The bonds were traded in the grey market even before the trigger was pulled, with the 10 year bonds trading at 1.7 cents per dollar over the issue price, and the 30 year notes trading at 2.6 cents over.

The sovereign’s current bonds also gained as a result of anticipation of the sale. Argentina’s outstanding 2033 notes rose 1.5 cents, reaching 127.2 cents to the dollar, a record high.

Of the proceeds from the 4 tranche bond sale, around US$10bn will be used to repay Argentina’s holdout creditors.

With the deal having been widely followed and led by US stakeholders, two thirds of the demand for the bond came from the US, whilst 25% originated from investors based in Europe.

Saichin noted that the sale was a particularly good result for the country, as it not only raised sufficient funds to repay its holdout creditors, but also had enough left over (about US$4.5bn) to put towards domestic financing requirements.

The global coordinators on the deal were HSBC, JP Morgan, Deutsche Bank and Santander. The joint bookrunners were UBS, BBVA and Citigroup.

Ivan Fink, a fixed income analyst with Schildershoven Finance B.V., a Dutch asset management firm and research house, said he expects spreads to tighten even further as the government continues to implement much needed economic reforms.

“Additionally, for these reasons, the rating agencies may raise Argentina’s ratings. It looks like the country’s rating could be upgraded to a B+ rating category over a period of 1-2 years, depending on the impact the reforms have,” he explained.

“We also expect the country’s corporate sector to start issuing bonds on the international market as the corporates now have a much higher chance of finding demand from investors at relatively attractive prices,” he added.

Alfredo Mordezki Zytny, a London-based director of Latin American fixed income at Santander said increasingly positive sentiment towards Ems also contributed to the deal’s success.

“Pricing came in at the tight end of the expectations and looked very tight for traditional investors in Argentina’s debt. But it also reflects the better mood towards EM. This week also saw a new deal from the Lebanese Republic ( B2, B- ) priced at 6.65% for a 2024 maturity. So, the better mood towards EM helped build momentum and added to the Argentinean story.”

“We think that Argentina will this year reopen the Latin American primary market, that has been almost closed for a year,” he added.

Latin America’s primary markets have been dormant so far this year. Last year saw just US$35bn of new issuances, compared to an average of US$85bn each year for the previous four years.

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