Latin America Bond: El Salvador’s US$1bn macro variable interest-only step-up notes
Back to dollars El Salvador was shut out of the US dollar market. Despite the nation’s positive messaging through bond buybacks in 2022 and a timely repayment of a bond maturing in January 2023, the market doubted the country’s ability to avoid defaulting on its bonds maturing in early 2025.
In late 2023, president Nayib Bukele moved to address what he viewed as a misleading narrative about the country, and his office assumed control of debt refinancing and negotiations with the IMF, which had been dragging on, while exploring innovative strategies to regain market access.
That effort paid off in a deal arranged by Bank of America. “We found Bank of America’s analysis to be very good, and we began building a strategy with them,” said a spokesperson for the president’s economic team.
The result was an unusually structured US$1bn bond deal in April.
A US$1bn 9.25% 2030 note was issued jointly with a macro variable interest-only note. The interest-only notes, which could be traded separately, paid a coupon of 0.25%, with a step-up to 4% if an agreement with the IMF was not reached within 18 months.
"The IMF agreement was perhaps the single most important factor in investors' minds, if not one of the top factors for a few years. So for an early 2024 transaction many investors did feel that it was like a Rubicon that the country had to cross to get market access,” said Max Volkov, head of LatAm debt capital markets at sole bookrunner Bank of America.
El Salvador’s position in the international market improved significantly after the deal. The nation’s 2029s, which were trading at 88 cents on the dollar in mid-April, reached 105 in mid-December.
“The deal was pivotal as it opened the door to two additional transactions, a debt-for-nature swap in October and a 30-year bond issuance in November, two transactions that moved the curve significantly,” the spokesperson from the economic team said.
Notably, the nation had initially considered a 10-year bond for the November offering but issued a 30-year bond at the request of investors.
“There was a boost in investor confidence. In the April deal, some investors wanted a shorter tenor. In November, they flocked in asking for long-term paper and the deal was over four times subscribed,” the spokesperson said.
Proceeds from the deal were used to purchase shorter-term bond debt.
"If you look at the beginning of the year, the country had been locked out of the markets while facing maturities pressure on the credit. Now, the country has basically no material external maturities until 2029. It's a massive transformation for a country in the context of one calendar year,” Volkov said.
El Salvador signed an agreement with the IMF in December.
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