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The Revival of Argentina’s Bond Markets

Argentina’s bond markets have been very active since the country’s resolution with its holdout creditors – and 2017 appears set to be another busy year for both investors and issuers alike. Horacio Aguilar, IB Director – Capital Markets & Corporate Finance at Puente discusses the current performance of Argentine local and foreign currency-denominated debts, what investors see in the country’s local paper and how corporates compare to the sovereign.

Oct 24, 2016 // 12:17PM

How does Argentine debt compare to similar debt elsewhere across LatAm?

If we compare current Argentine yields to other issuers across the rest of the region, Argentina still trades at wider levels. For example if we look at the country’s neighbors such as Brazil, Uruguay, Paraguay and Bolivia, they all trade at levels between 3 to 5% for 10-year notes, with Argentina now closer to those levels after its recent rally, but still above that range. Having said that, the last few years, Argentine issuers when issuing in the international markets were looking at rates with double digits, so the situation has improved considerably.

Furthermore, if we compare Argentina to its peers on ratings, most of the sovereigns with a rating in the B- area trade in the 8 to 9% range, while, as said before, Argentina trades closer to 6%. This shows the positive momentum and credibility the country has gained with the international markets. International investors continue to carefully track the changes in the local macro and political environment, and if the positive trend of macro and political stabilisation continues, investors’ interest will continue and possibly increase.

How developed is the local bond market? To what extent is there a concerted effort to develop this?

Given the absence of international investor interest in Argentine assets over the last few years, which resulted in limitations for local issuers to issue debt in the international market, there has been a considerable level of activity in the local market, which has been open and very active. Having said that, the local market has had limitations in terms of size and tenor. On average, local DCM transactions have ranged within the US$10mn to US$30mn area, with tenors typically between 1 to 3 years.

More recently, the increasing level of interest from international investors towards Argentina not only brought demand for Argentine international market transactions. We are also seeing investors increasingly accessing the local market or demonstrating interest in participating in local market transactions. If this trend continues, there is a high potential for the further development of the local market, not only in terms of size, but also in terms of structure and tenors.

We are also seeing efforts form the government to facilitate this development which is also very good news, with the objective of having a stronger local market that would offer alternative financing options to local issuers, from SMEs, to mid-cap and large corporations. Recent and current measures being implemented such as a tax amnesty, the lifting of FX restrictions, and new capital market laws among others are all good indicators of market friendly regulation that considerably increases the local market’s potential development.

What is the outlook for the country’s bond markets? Are we likely to see additional activity from Argentina’s markets going forward?

We have seen a very high level of activity in the first half of 2016, mainly from the government and quasi-government sectors. From the issuers’ side, we expect more issuers to go to market this year as well as in 2017. There are still a few provinces that are getting ready to access the market, and also we expect to see an increasing number of issuers from the corporate sector.

We have been in a situation over the last few years where there was a lack of supply from the corporate sector because in most cases it did not make sense to issue at double-digit levels. With the recent yield compression, many corporate projects that have been on hold due to elevated financing costs are now become economically viable.

Therefore, we expect to see an increase in the number of corporate issuers accessing the market. From the investors’ side, we expect to see continued interests both from local as well as international investors as orderbooks are consistently being oversubscribed by 2 or 3x.

To what extent is demand for Argentine paper likely to change going forward now that the country has returned to the markets?

We expect to continue to see good demand for Argentine issuances going forward. It will be important that the country continues the path of economic stabilisation and political and regulatory transparency to strengthen this trend.

In addition, if this trend continues, it will increase the chances of a rating upgrade for the country, which of course would be viewed very positively by investors. Credit rating agencies have clearly indicated the path Argentina should follow to continue improving its rating outlook, and have positively responded to the new administration’s policies.

In terms of type of issuances, as previously noted, we expect an increasing number of corporate issuances going forward, which typically offer a good spread to the sovereign and should see good levels of demand from investors looking for yield.

How does corporate and sovereign (including quasi-sovereign) debt compare in Argentina?

In general, corporate debt has a wider spread against sovereign debt; however, in Argentina that has not always been the case. Given the country has been in default for several years, we have seen good local credits trading tighter than the sovereign.

This situation started to normalise after the country’s settlement with its holdouts and subsequent sovereign debt rally. Currently, most corporate issuances going to market are offering a slight spread to the sovereign, which should be viewed positively by investors who are already comfortable with Argentine risk and are looking for a return above that of the sovereign’s.

Sovereign and quasi-sovereign issuances have dominated debt offerings in 2016, representing roughly 80% of the total debt issued, which is high compared to other Latin American countries. Still, indebtedness ratios continue to be low in Argentina at all levels, including government, quasi-government, corporates, and for individual borrowers. Therefore, if the positive scenario continues, we expect to see additional supply across different sectors.

How do international investors view the peso? Are they buying local debt? How is this likely to change going forward?

The local market has dominated local currency issuances over the last few years. However, we are starting to see considerable interest from international investors in peso-denominated issuances. A recent example is the ARS23bn issuance by the government in mid-October. The size of the issuance suggests the presence of big foreign players, which highlights the level of demand for local currency paper by international investors.

The rationale behind this is based on the relation between the high level of interest rates in local currency and the low expectation for FX depreciation. We expect to continue to see capital inflows into the country, which should put a ceiling on the level of FX depreciation, and therefore current interest rates in pesos, which given Argentina’s high inflation levels, are highly attractive.

To what extent are local players active in either the Argentine local or international bond markets? How could this change?

Given the low level of international issuances in the last few years, local investors have participated mainly in local market transactions. International transactions have not been their focus, and that translated into low participation in the orderbooks of the few foreign transactions that accessed the market. As long as the local market continues to develop, we should see an increasing level of participation from local players on international transactions.

Until recently, we have seen a big separation between local and international market transactions, which should not be the case going forward. The local market should complement the international market, as is the case in more developed markets across the region.

On the other side, until recently, we have not seen a considerable interest from international investors in local market transactions. This had to do not only with interest from investors, but also with several regulatory restrictions preventing foreign investors from participating in local offerings. Several of these restrictions have now been lifted (included FX repatriation limitations, among others), and we expect to continue to see further reform from the government to facilitate foreign investor access to the local markets.

That being said, we are already seeing an increasing level of demand from foreign investors in local offerings, both for public sector and corporate issuances. As an example, we participated in IRSA’s recent local offering in September, were the company issued close to US$200mn of local currency-denominated paper, which was to a large extent placed with foreign investors.

How do capital inflows compare to capital flight?

Capital inflows this year will probably easily exceed capital flight, as Argentina will be facing the largest financial account surplus since the 1990s (a surplus of around US$15bn as of August). Since the holdout resolution we have seen a huge pick-up in inflows, channeled mainly through debt issuances, which has exceeded the increase in capital flight that followed the elimination of FX restrictions.

Financial inflows had performed poorly since the 2001 crisis, and never fully recovered. Between 2011 and 2015, the FX market was heavily restricted, but inflows during that period were extremely weak, too poor to offset even limited capital flight.

The story now is quite different, with inflows sharply boosted following the holdout resolution in April this year, as mentioned earlier. Capital flight has picked up as well, though mainly because it compares to a low base (the FX market was highly restricted until last year), and the level has remained much lower than inflows.

In figures, capital inflows through global debt issuances have accounted for US$21bn year-to-date, including debt issued by the sovereign, provinces and corporates net of holdout payments and tenders. More recently, sovereign local currency debt issuances have also attracted foreign investors’ interest. Portfolio investments, multilateral loans and FDI have performed positively but more modestly and account for around US$4bn worth of net inflows by August. Capital flight, on the other hand, amounted to only about US$9bn year-to-date as of August.

Americas Argentina

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