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CASE STUDY: Panama Achieves Lowest Rates, Longest Tenor with USD2bn Sovereign Bond

The dual-tranche Eurobond, issued at a politically delicate moment that saw a new government take the reins in Panama, was the country’s largest single transaction and generated an impressive oversubscription rate of over 5x.

The dual-tranche Eurobond issued by the Republic of Panama was received well by investors

Dec 11, 2019 // 12:55PM

Deal at a Glance
Deal Type: International bond
Deal Structure: Senior, unsubordinated, unsecured dual-tranche
Issuer: Republic of Panama
Deal Size: USD2bn (USD1.25bn; USD750mn)
Pricing Date: 17 July 2019
Coupon: 3.160%; 3.870%
Price: 99.982%; 99.939%
Yield: 3.16%; 3.87%
Spread: T+110bp; T+140bp (+/-5bp)
Tenor: 10 years; 40 years
Maturity Date: 23 January 2030; 23 July 2060
Amortisation: Bullet to maturity; Panama will pay the principal of the 2060 bonds in three equal instalments on July 23 of each year, commencing on July 23, 2058
Rating: Baa1/BBB+/BBB
Governing Law: New York Law
Listing: Luxembourg Stock Exchange/Euro MTF Market
Bookrunners: Citigroup, JP Morgan
Legal Advisor to Issuer Arnold & Porter (international); Dr. Rigoberto González Montenegro (Local)
Legal Advisor to Borrower Sullivan & Cromwell (international); Arias, Fabrega & Fabrega (local)
Use of Proceeds General budgetary purposes

Background

In May 2019 general elections were held in Panama in the midst of an economic slowdown and a looming crisis in the public finances, with trade unions going on strike across the country. The election was won by Laurentino Cortizo Cohen of the PRD party, which won a majority in the National Assembly.

At the start of July 2019, the new leader announced the launch of an investigation into corruption allegations around Odebrecht’s activity in the country, with more than 80 individuals including children of Panama’s ex-president Martinelli embroiled in the investigation.

Despite the political noise, and with fiscal and economic challenges rising, and less than a year on from the sovereign’s previous issuance of USD550mn 2050 international notes, Panama returned to the market with a dual-tranche international bond that priced well below 4% and saw USD11bn worth of orders.

The whole transaction took just 17 days from initiation to a close – an impressively tight deadline for a new government to hit.

Transaction Breakdown

On July 17 the government of Panama announced the launch of a dual-tranche sovereign bond for a total value of USD2bn (USD1.25bn and USD750mn), setting the IPTs at T+140bp area and T+165bp area for the long 10-year and 40-year, respectively. As the order book gained momentum with several large high-quality accounts coming on board, the issuer was able to tighten aggressively by 25bp.

The 10-year and 40-year notes priced at a very impressive 3.160% and 3.870% respectively, well below the 4% level expected from a triple BBB emerging market sovereign credit. The coupons represented a new issue premium of 5bp and set new benchmarks along the sovereign credit curve, with the 40-year tranche pricing 630bp tighter than the 30-year USD550mn issued in 2018. It compared favourably to Panama’s peers – Mexico and Peru – and traded 12% higher on the secondary markets in following months.

In the prospectus, investors were warned about a range of risks related to the sovereign. These included broad global factors, including interest rate outlook in the US and trade tensions, as well as local factors like political and social instability in Panama, partly as result of impending tax reforms, political unrest in neighbouring countries, and the rising risk of natural disasters – which could hinder the proper functioning of the Panama Canal.

Despite these concerns, international investors piled into the issuance with USD11bn worth of orders, representing more than 5x oversubscription on Panama’s largest issuance in a single transaction to date.

By region, 66% of the 10-year notes were place with accounts in the US; 25% went to EMEA investors; 7% were picked up by regional investors and remaining 2% went to APAC accounts. For the 40-year, 55% went to US investors; 39% to EMEA, 5% to APAC and 1% to Latin American accounts.

By type, the bulk of allocations was placed with asset managers (76% for 10-year and 82% for 40-year); pension funds picked up 13% of 10yrs and 11% of 40yrs; private banks – 8% and 2%; and remaining 3% and 5% respectively went to hedge funds.

The success of the issue meant that the government was able to immediately begin disbursing the funds to plug budget gaps, initiate the payment of the accounts owed to suppliers, including government and public sector workers, and to reinvigorate the country’s economy.

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