Paraguay takes guarani bonds to the world
Paraguay sold its first international offering of a domestic currency bond on Monday, raising G3.64trn (US$500m) from a guarani-denominated global bond alongside a US$500m US dollar tranche.
The US dollar bond was eight times subscribed, although this was neither surprising nor unprecedented. Books have been consistently high for the sovereign's annual US dollar offerings since 2013 when Paraguay first issued international bonds, given its scarcity value, solid fiscal strength and favourable debt metrics.
The success of the inaugural guarani tranche was much more notable, however – especially given that it was extremely large relative to Paraguay's domestic primary market, which typically sees issuance of around US$350m per year. It was also well received by investors and was 2.5 times subscribed.
Citigroup, Goldman Sachs and Itau were bookrunners.
"For the first time ... it's incredible," the South American nation's finance minister, Carlos Fernandez Valdovinos, told IFR on Tuesday.
According to Fernandez, Paraguay's credit rating trajectory helped strengthen demand. "We are one notch [below] investment grade, and everybody is expecting something will happen this year. So it's better for you to get into the boat before the boat departs," he said.
Paraguay was upgraded by S&P to BB+ earlier this month from BB, Fitch also rates the sovereign BB+, while Moody's rates it at Ba1.
The 6% US dollar 12-year tranche printed at par after initial price thoughts of 6.25% area, while the 7.90% guarani seven-year tranche priced at par after price thoughts of low 8% area.
"We are not investment grade yet, but our local currency deal issued with [a lower] interest rate than [equivalent bonds from] Uruguay, for example, and our dollar bond priced close to [equivalent deals from] Peru," Fernandez said. Uruguay and Peru have investment-grade ratings.
"We are very happy that markets are already granting Paraguay investment-grade [pricing] levels," he said.
Monetary conditions in Paraguay also helped stir investor interest in the guarani notes.
"We have been able to put inflation below target, well in advance of the [US Federal Reserve] and other countries. Our target inflation is 4% and inflation is 3.4% at this moment," Fernandez said. "This means that today's 7.80%–7.90% domestic market yields are going to be lower in the near future, making this moment the right one for investors."
Fernandez said Paraguay's international guarani offering also benefited from the market's increasing familiarity with local currency bonds.
"Jamaica, Uruguay, Dominican Republic, Peru, Chile and Mexico have all issued recently in local currencies, so even though we are not the same countries, investors have become more familiar with local currency offerings," he said. "They know how they work, and how to make their calculations."
Soil prep
Strong investor support for the guarani component was also founded on careful preparation for the deal, Fernandez said.
"The whole process of getting here was two-step," he said. "The first step was a big local market issuance to set the benchmark, and the second one was to come to the international market."
In December, Paraguay executed a G1.61trn deal in five and seven-year bonds. "That was huge – it was the largest issuance ever in the domestic market. For us, it was important because its size gave us the reference for the bond issuance that we were planning to do in the international market," Fernandez said.
The domestic seven-year priced at 7.80%, close to the 7.90% yield on the international offering.
"It was basically the same," Fernandez said. "Without this benchmark rate everyone would have been speculating about the price, looking for comparables in Brazil or Uruguay, countries that are very different from Paraguay."
The December deal, as well as a smaller one in June, also helped Paraguay gauge international appetite for guarani bonds.
"We suspected that investor interest in guarani bonds was high because in December, when we issued [domestically], and also in June, when the previous government issued a domestic bond, about 12% of total issuance was purchased by foreign investors," Fernandez said.
Plans
Paraguay plans to continue issuing around US$1bn in the international market plus US$300m-equivalent in the domestic market every year, Fernandez said.
"That has been our promise and we have been consistent because we want to give liquidity to Paraguayan bonds," he said.
Paraguay's government aspires to continue de-dollarising the country's debt, but the exact mix of guarani and US dollar issuance for the international component will depend on demand.
"If demand for local currency is strong, we will continue to build a yield curve for the local currency," he said.
Fernandez said there will be demand for guarani bonds because they have a higher upside potential than US dollar bonds.
"The spread for Paraguay is so compressed at this moment in the US dollar, that you are probably going to gain more with the guarani when Paraguay gets an upgrade," he said.