Breaking new ground
Uruguay broke new ground in 2017 with its first-ever Global fixed-rate peso bond – a US$1bn-equivalent five-year that opened an entirely new market for the South American country.
It may not have been the largest sovereign trade of the year, but it marked a significant shift for a country that had until then relied exclusively on US dollar or expensive inflation-linked issuance abroad.
The success of the Ps28.2bn five-year trade in June – quickly followed three months later by a 10-year – was a milestone event for Uruguay, which for the first time in 2017 covered all its funding needs in pesos.
“Being able to build an international fixed-rate curve out to 10 years in a matter of months was a game-changer,” said Surya Bhattacharjee, managing director for Latin America debt capital markets at BBVA, which led the deal with Bank of America Merrill Lynch and Morgan Stanley.
That’s important for a sovereign still trying to redress what economist Ricardo Hausmann once described as the “original sin” – developing countries’ inability to borrow abroad in their own currency.
Rating agencies put considerable importance on a country’s exposure to hard currency debt, of which Uruguay still has a fair amount.
At first glance selling a fixed-rate peso bond to foreign accounts seemed like a tough slog for a country with a history of high inflation, and bankers were initially pitching a 13% yield for the five-year deal.
Taking advantage of the central bank’s success in taming price rises and a strong bid for local currency debt, the sovereign embarked on a six-day roadshow to make its case among international accounts.
“Selling this story against the inflation backdrop was not easy and it required a huge marketing effort,” said Bhattacharjee. “That roadshow was invaluable to getting the deal done.”
Nor was price discovery a simple process given the uniqueness of the trade, as investors compared inflation expectations, political stability and overall liquidity across the asset class.
“There was a huge relative value conversation going on,” said Bhattacharjee. “When we started the conversation there was a 100bp range in price discussions and we ended up at the tight end of that.”
Starting with initial price thoughts of low-to-mid 10%, leads landed the deal at a yield of 10% with a 9.875% coupon after generating a book of around US$5.5bn equivalent.
The yield on the bond fell all the way to a mid-market price of 7.95% in September, when Uruguay returned with a US$1.1bn-equivalent 10-year fixed-rate bond that came at 8.625%.