El Salvador bond idea sends negative IMF signal

IFR 2395 - 07 Aug 2021 - 13 Aug 2021
3 min read
Americas, Emerging Markets

El Salvador floated around the idea of a potential bond deal last week during an investor presentation, an announcement many are seeing as a possible move away from an awaited deal with the International Monetary Fund.

In investor calls last week, El Salvador finance minister, Alejandro Zelaya, informed investors it was contemplating an external bond issuance to finance some of its short-dated local notes, according to sources. The announcement prompted some market participants to question whether the country will reach a needed agreement with the IMF as it comes against maturing liabilities in 2023.

"For us, if they do look to come to the market it really brings into question whether or not they’re interested in pursuing an IMF programme. Why would they be doing that at a time when it’ll be prohibitively expensive for them? It doesn’t make sense in the current environment," said an investor following the credit.

The sovereign's bonds have continued to fall since early June, when the country's president Nayib Bukele announced that El Salvador would become the first country to adopt Bitcoin as a legal tender. The announcement fuelled concerns that it could jeopardise a deal with the IMF.

El Salvador's 7.125% 2050 was trading early last week at 80.15, down 14 points before the Bitcoin announcement, according to MarketAxess.

Similarly, its 5.875% 2025 note traded at 87.50 as of August 5, a sharp drop from June 4 levels of 98.90.

"The distressed yields suggest restricted market access with re-entry only possible at lower levels under a formal IMF programme," said Siobhan Morden, head of Latin America fixed income strategy with Amherst Pierpont Securities. "The recovery on Eurobond yields requires a credible sources/uses financing programme for 2021 and beyond."

El Salvador (Caa1/B–) has maintained that a deal with the IMF is still forthcoming. However, the latest round of investor communication was not convincing about how it would pursue the economic policies and governance required for an IMF programme, said Morden.

"There has been no apparent progress on diplomatic US relations after the cumulative setbacks with concerns about good governance criteria," she said in a report.

Moody's downgraded the sovereign to Caa1 from B3 on July 30, citing market accessibility and liquidity concerns as some of the drivers behind the move.

"Limited availability of funding alternatives for the sovereign and uncertainty surrounding the possibility of fresh financing from the International Monetary Fund suggest that the sovereign will continue to face liquidity pressures in future years," said Moody's.

A series of dollar bond redemptions from January 2023, along with upcoming liabilities in the local market, is putting further pressure on the sovereign.

"People who are playing in El Salvador will know the risks involved. But for other investors, people in my world, we will stay as far away from El Salvador as we can," said an EM trader.

Officials from El Salvador's finance ministry did not immediately respond to a request for comment.