Falabella issues inflation-indexed bonds as inflation falls

Chile’s Falabella tapped the domestic market with a dual tranche bond. As with all long term debt in Chile, the longer duration notes are inflation-indexed bonds. But a recent strengthening of the country’s peso could lead to inflation falling in the near future, which could affect demand.

May 6, 2016 // 5:09PM

Chilean retailer Falabella has tapped the country’s local debt markets for the equivalent sum of US$175mn.

The bond consists of two tranches. One tranche, worth CLP63bn, has a six year tenor with a 4 year grace period and carries a yield of 5.15%.

The second tranche, which is inflation linked, has a tenor of 23 years and a 20 year grace period. The second bond carries a yield of inflation +3.17%.

Isabel Darrigrandi, Head of Investor Relations at Falabella said currency volatility deriving from the fact that Chile is a commodity dependent country has always demanded that longer term Chilean debt be linked to inflation.

However, there are signs that inflation levels in Chile, although still high, could be falling.

“The fact that the country’s currency has strengthened leads us to believe that inflation levels in Chile will fall,” said Neil Shearing, Chief Emerging Market Economist at Capital Economics.

The country’s currency, the peso, has rallied 5.8% against the dollar over the last three months. As a result, inflation has been falling, from 4.7% in February to 4.5% in March. The government is planning to bring inflation down to between 2% and 4%.

Adam Collins, an Assistant Economist at Capital Economics said that inflation is expected to fall to 3.5% by the end of the year, but added that it would not come down much lower than that.

Despite the fact that inflation is falling, both of the bonds were oversubscribed by more than two times. Collins noted that falling inflation was not likely to detract investors from the inflation-indexed bonds.

In addition to the local currency bonds that Falabella recently issued, the company has US$900mn in outstanding dollar debts.

Darrigrandi noted that elsewhere in Latin America, long term debt is usually denominated in US dollars.

Falabella’s dollar denominated debt is split between a US$500mn issuance from 2012, its debut bond, and a US$400mn issuance from 2014, which was used to fund the acquisition of the Peruvian company Maestro. All of these bonds are fully hedged to maturity.  

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