Sunday, 21 October 2018

Americas Issuer: Argentina

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The comeback kid

Locked out of the international capital markets for 15 years, Argentina made a triumphant return in 2016, propelled by a new government intent on putting the country back in business. The Argentine sovereign is IFR’s Americas Issuer of the Year.

The election of Mauricio Macri as president in November 2015 did more than simply end years of Peronist rule in Argentina – it offered a chance to bring the sovereign back in from the cold.

The country had been a pariah for more than a decade, frozen out of the international capital markets as a result of a long-running legal battle with its holdout creditors.

That fight had led to a technical default and prevented the sovereign from raising much-needed hard currency funds, even as cash reserves dwindled and the country plunged into the red.

“To finance the deficit they had to rely on local sources, which meant printing money, which put pressure on inflation,” said Sergio Lew, head of US credit markets at Santander.

“It was critical to regain access to the international market.”

That was a crucial goal of Macri’s new administration.

And that meant settling with litigant investors, led by US hedge funds Elliott Management and Aurelius Capital, which had fought the country so bitterly over debt payments that nationalists called them “vultures”.

In a high-stakes calculation, Argentina’s new finance team, led by former JP Morgan banker Alonso Prat Gay, opted to settle in cash rather than pay the holdouts with expensive bonds.

Secretary of Finance Luis Caputo told IFR at the time that the strategy ended up saving the country more than US$2bn.

“Negotiating a price of a potential payment-in-kind would have extended negotiations and inflated the interest bill,” he said.

“We knew we would be able to place the new bonds at a much better price than what holdouts were willing to pay for them.”

As Argentina was undertaking tricky negotiations with the holdouts, it was also preparing the grounds for a new jumbo bond – its first international debt raise in 15 years.

Many on Wall Street expressed confidence that the sovereign could get a deal done – Macri had the broad backing of the markets – but the deal was still far from a foregone conclusion.

“We spent days and lots of sleepless nights analysing the risks with the issuer,” said Matthew Dukes, a director at Deutsche Bank.

“We were able to put a structure in place that mitigated the risks significantly.” (For the specifics of the transaction, see Latin America Sovereign Bond of the Year.)

As a first step, banks that ultimately won the bond mandate lent billions to bolster the central bank’s reserves as Macri prepared to float the peso to help normalise the economy.

“The floating of the currency was an enormous catalyst in terms of the government showing it had a serious action plan,” said Robert Silverschotz, head of fixed-income syndicate, Americas, at Santander.

“[The loan] was essential for the buyside to understand that FX reserves were there.”

Argentina and its four global coordinators – Deutsche Bank, JP Morgan, HSBC and Santander – were then able to piece together a US$16.5bn trade in only four months.

“Argentina had a fantastic team and they delivered at a very different level from anything we have seen in the past,” said Katia Bouazza, co-head of global banking for Latin America at HSBC.

“As good as the banks were, if it hadn’t been for that team, the deal wouldn’t have got done in four months.”

Opening the doors

The offering attracted an extraordinary US$69bn order book – the biggest ever, topping even that seen on the groundbreaking record trade from Saudi Arabia a few months later.

That strong showing underscored how successful Macri’s administration had been in winning back market confidence in the sovereign – and in turn it helped other Argentine issuers to follow.

Indeed, the deal ignited a rush to the capital markets that saw some US$8.7bn in supply from the country’s provinces and corporates between April and November.

Surprisingly, there was also more to come from the sovereign, which came to market again with a US$2.75bn two-part trade just three months after its historic market return.

Despite some grumbles that Argentina was breaking a pledge not to issue more US dollar supply in 2016, the deal attracted nearly US$7bn in orders.

Proceeds were slated to take out expensive GDP warrants and save the country up to US$9.4bn, and it made sense for Argentina to strike while the iron was hot.

Moreover, due to the low-rates environment, investors were on the hunt for yield – and keen to gain exposure to the sovereign’s unexpected turnaround story.

This was particularly true in Europe, where the ECB’s quantitative easing programme had pushed yields on trillions of dollars of bonds into negative territory.

Time for euros

In October, Argentina thus returned with its first euro-denominated bond in 15 years – a €2.5bn dual-tranche issue.

The strength of appetite was evident, with the combined books reaching €6.25bn at launch.

And even that had been scaled back, as orders dropped out when pricing was ratcheted in some 50bp on both notes, with the January 2022s landing at a yield of 4% and the 2027s at 5.125%.

While other sovereigns had flatter 5/10s curves, the leads felt that, as the long five-year was offering 4%, they needed to ensure the long 10-year was also attractive.

“They wanted to plant the seeds,” said a banker. “It was very important to get the curves right.”

The diversification into Europe was smart for a government that required the substantial funding needed to buy time to move away from the old regime’s failed economic policies.

Macri’s administration was also clever enough to renew appetite for Argentine risk through its own local market, where it has developed a local curve at a rapid pace.

Taking advantage of strong demand for local paper among foreign accounts, the sovereign issued new peso-denominated seven and 10-year fixed-rate bonds in October.

Building a robust local market and reducing the reliance on hard currency was vital for a country that had repeatedly struggled to cover its international debt payments.

Now, analysts believe that Argentina will give foreign investors freer access to the local market, so that the sovereign qualifies for inclusion on the JP Morgan’s GBI-EM local currency index.

That will open the country to another large pocket of demand among investors who track the index and provide an important buffer at a time of increasing volatility for emerging markets.

In all, it has been a remarkable turnaround for Argentina, a nation isolated for so long – and now an important player in Latin America’s debt capital markets.

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