* City considering callable bond, ECP and US dollar-linked
* Short-term funding would buy time in election year
* Double-digit yields eyed on potential int‘l bond
By Davide Scigliuzzo
NEW YORK, Oct 28 (IFR) - The city of Buenos Aires is sounding out foreign investors on short-term funding as it looks to refinance upcoming maturities, according to two sources with direct knowledge of the meetings.
Options include a new five-year non-call two international bond, Euro Commercial Paper (ECP), and US dollar-linked bonds that are issued domestically in dollars but payable in pesos.
“They are a very well-run city and they don’t want to be in a difficult position in 2015, so they are doing their homework,” one source said.
Yet the city faces a dilemma. US dollars would allow it to build a buffer to meet international bond maturities without draining Argentina’s dwindling foreign exchange reserves.
But that is much costlier - and more complicated - than tapping local peso funding.
The city has a 12.5% US$475m bond that matures in April 2015 and a 9.95% US$415m note coming due in 2017.
After setting aside pesos in their budgets to repay external indebtedness, local governments typically use those funds to buy foreign exchange from the central bank. Yet that may prove difficult should economic conditions worsen.
“Their concern, like mine, is that Argentina is going to face a balance-of-payment crisis by the beginning of next year, which would severely compromise the country’s external liquidity position,” the second source said.
Such risks may lead foreign accounts to demand a structure that would require the borrower to capture dollars for coupon and principal payments offshore.
Short-term funding will buy the city more time before presidential elections in October next year, when a more market-friendly government is expected to come to power.
It is hoped that any new administration would begin talks to settle the country’s decade-long dispute with creditors who refused to accept the restructurings of 2005 and 2010 and are demanding full repayment of their Argentine debt holdings.
If that happens, the city could then take out short-term financing at lower rates on the back of any relief rallies.
“They have a sense that after the elections they will be in a better situation, given that the three leading (presidential) candidates are going to adopt more orthodox policies,” the first source said.
President Cristina Fernandez de Kirchner, who has long opposed a settlement with the holdouts, is unable to run again in 2015. All three front-runners to replace her are expected to steer the country towards more market-friendly policies.
In the meantime, however, international funding through commercial paper or a callable bond is likely to come at much higher interest rates compared to the domestic dollar-linked market.
“A new five-year non-call two (bond) would have to offer a double-digit yield,” said Jorge Piedrahita, chief executive officer at Torino Capital, a brokerage firm focusing on distressed debt in emerging markets.
The city of Buenos Aires’s outstanding 2017s were spotted Tuesday at a cash price of 102, for a yield to maturity of around 9%, said Piedrahita.
With international markets essentially closed to Argentine issuers, both the city and the sovereign have been relying on the domestic market in recent months.
In September, Buenos Aires raised the equivalent of US$111m dollars through a tap of its 3.98% May 2019 US dollar-linked notes that priced at a yield of just 2%.
“Why would they go to the international market if they can get a six-year maturity in Argentina at 2%?” said one banker in the Argentine capital. “It doesn’t make sense to me.” (Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Marc Carnegie)