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CASE STUDY: Peru’s Local-Currency Bond Sees Appetite from International Investors

On September 29, 2016, the Republic of Peru successfully executed a highly successful record-setting ‘tender/switch’ liability management (LM) and new issue transaction. The new deal allowed Peru to establish a new liquid 12-year local-currency benchmark as well as reduce the country’s US dollar-denominated debt exposure – an aim of the government’s on expectations of a US rate hike either by the end of the year or by early 2017.

Oct 28, 2016 // 6:50AM

Deal At A Glance

Deal Type: Unsecured unsubordinated public debt

Deal Structure: GDN (144A/RegS), bono soberanos

Governing Law: Peru

Borrower: Republic of Peru

Lead Bookrunners: Bank of America Merrill Lynch, BBVA, HSBC

Legal Advisors to borrower: Simpson Thacher & Bartlett LLP (international counsel), Lazo, De Romana & Gagliuffi Abogados (local counsel)

Legal Advisors to Bookrunners: Shearman & Sterling LLP (international counsel), Garrigues Abogados (local counsel)

Size: PEN10.25bn

Tenor: 12 years

Coupon/Margin: 6.375%

Reoffer price/Yield: 99.851%/6.350%

Date of Issue: September 29 2016

Use of Proceeds: To refinance existing debt and reduce Peru’s US

Background

The PEN10.25bn 6.350% issue covered GDNs due 2028 and consisted of an LM exercise that targeted a total of eight securities: four of which were bonos soberanos available in two formats (domestic settled in PEN, and offshore via GDNs settled in USD), maturing in 2017, 2020, 2023 and 2026, whilst the other four were in global notes format and reach maturity in 2019, 2025, 2033 and 2037.

The transaction achieved a positive NPV result by successfully managing the allocation of cash and switch tenders of each of the eight targeted securities.

Investor confidence in the Republic’s strong local currency (sol), stable credit (the issue carried a rating of A3 stable, A- stable and A- stable by Moody’s, S&P Global Ratings and Fitch respectively) and new government allowed for a record breaking demand of over PEN25.0bn.

This strengthened Peru’s position as the only country in the region able to achieve a transaction of this size denominated in local currency.

Transaction breakdown

The new PEN10.25bn notes represent the largest ever sol-denominated single offering from Peru, and the largest ever local-currency transaction (US$3.04bn equivalent) issued on the international markets by any Latin American issuer.

The issuance of PEN10.25bn in new 6.350% bonos soberanos and GDNs due 2028 consisted of a PEN1.60bn tranche (US$474.57mn equivalent) issued for cash in order to fund the cash tenders and a PEN8.65bn (US$2.57bn equivalent) tranche issued for a switch of old soberanos and global notes.

Prior to the transaction’s launch, the Republic of Peru conducted a series of investor calls and 1-on-1 investor meetings in New York, London, Los Angeles and Boston, visiting over 62 investors in total.

Following robust investor demand and an efficient book-building strategy, the Republic was able to reduce the coupon of new bonds from initial price thoughts (IPTs) of 6.625% to 6.350% at final pricing on September 29, as well as increase the amount of financing raised to fund new cash tenders from PEN806.83mn to PEN1.60bn. The deal issued later the same day, and is set to mature on August 12 2028.

The PEN orderbook was Peru’s largest ever, achieving multiple-times oversubscription and reaching a maximum size of over PEN12.0bn for the acquisition of new bonds and over PEN13.0bn for the switch tenders.

International investors comprised 60% of the allocated orders, underscoring the existing investor appetite for Peru’s credit and its local currency soles.

The bond was distributed 60% across Europe, the Middle East and Africa, 19% across the US and 21% across Latin America.

By type, 67% of the bonds were bought by asset managers, 19% by banks, 4% by hedge funds, 4% by pension funds, 5% by insurance companies and 1% by private banks.

Americas Peru

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