After being shunned by international capital markets for nearly 15 years, Latin America’s most prominent serial defaulter issued US$16bn sovereign bond, setting a benchmark which allowed the provinces and the corporates to follow suit.
Since Argentina settled its dispute with a group of holdout funds in 2015, the country’s corporates have been very active in the international markets as they seek to take advantage of the lower spread on sovereign debt, in the quest to lure foreign capital holders, who at the same time has been pushed from the developed world’s markets by low rates.
These investors eagerly snapped up attractive Argentinian notes, not only due to the juicy returns on offer, but also as a gesture of encouragement to economic policies of centre-right president Mauricio Macri.
According to data compiled by Research for Traders (RFT), until April this year, between the sovereign, local governments and corporates, over US$13.2bn worth of Argentinian debt has been placed in the international markets. The corporates alone managed to raise US$3bn in the Q1 of 2017.
Among the most prominent deals to note are Capex's bondworth US$300mn maturing in 2024 with a 6.87% coupon, and Aeropuertos Argentinas, which issued a 10-year bond with a 6.87% coupon.
A new trend emerged in the corporate space this year as well: “peso-linked” bonds, which are dollar denominated securities where yield is linked to the dynamic of the peso or the local exchange rates, allowed investors to take advantages of the high yields on the local currency. Supervielle Bank, Tarjeta Naranja and YPF issued this type of securities that were a hit with investors.
Banco Macro, a local lender, took it one step further when it tapped the international markets with a peso-denominated bond, the first of its kind. The five-year notes will pay a fixed rate of 17.5% in peso each year with a yield around 250bp (2.5% annually) over the sovereigns.
According to Jan Dehn, Head of Research at Ashmore Investment Management Ltd, Argentina’s corporates bonds have become very attractive for international investors, especially compared to corporate bonds markets in the developed world, as they get paid a “bigger spread per turn of leverage”. He does warn, however, that compared to other segments of EM fixed income space “corporate external debt now looks a bit expensive”.
Not every sector in Argentina’s corporate bond universe has been received with equal excitement from the investor community. Certainly, the most popular have been the energy industry, which has been at the receiving end of many favourable reforms from the current government: almost every issuance by energy companies has been oversubscribed.
For example, Pampa Energia’s 10-year notes carried a 7.625% coupon and received orders for over U$4bn. Other energy companies have also tapped the international markets, such as AES Generacion, with a 7-year bond worth US$300mn and Genneia, which issued a US$350mn five-year bond with an 8.75% and received orders for over US$1bn.
“I prefer quasi-sovereign corporates in the energy sector, they are actually going through a world of pain right now, but this means spreads are wide and they can usually count on a sovereign backstop. Hence, they offer yields that are good value for money,” Dehn agreed.
Risky Business
Regardless of the fact that investors have been indulging Argentina’s issuance pipeline, the country’s unremarkable credit history should come into consideration. Since Argentina became an independent nation, it has failed to honour its financial obligations on six different occasions.
This is why among the most obvious risks associated with Argentinian corporates is a stronger dollar and the possibility that a company’s debt would become too expensive for them to repay in the future, especially those with revenues in pesos.
Still, for Dehn, FX mismatch risks are “overstated”:
“Most corporates with FX mismatches actively hedge. Also, many are exporters, so they have revenue streams and should issue in dollars, since it reduces rather than increases FX mismatches,” the EM investor explained.
The real risk for any of Argentinean securities is more aligned with the macroeconomic indicators of the South American nation.
Even as Macri has set an ambitious economic reform agenda since he took power in 2015, growth has failed to pick up. According to data provided by Indec, the national statistics agency, Argentina’s economy grew only by 0.3% in the first quarter of this year and saw overall growth of 1.1% in 2016, while inflation continued to rise and miss the government’s targets.
“The lack of growth is the more serious risk. The government is issuing a lot, which uses up the financing that ought to go to the private sector. Rates are rising too. This crowds out private sector growth, which at the same time hurts overall growth” Dehn concluded.
A strong presence in the capital markets would certainly help Argentina’s private sector expand, which would also be good for the country’s economy. However, it remains to be seen how long international investors will stand by Argentina’s asset if the country continues to underperform.
