By Paul Kilby
NEW YORK, June 30 (IFR) - The Republic of Argentina announced a two-part US dollar bond sale on Thursday, just three months after its historic return to the international capital markets.
The country is looking to raise funds to take out expensive GDP warrants, but the timing has caused a bit of a stir after it said it would hold off from further issuance in 2016.
Argentina was locked out of the markets for a decade and a half due to default, but sold US$16.5bn across three, five, 10 and 30-year tranches in April - while saying it was done for the year.
"It is a big deal because credibility matters," said Sean Newman, senior portfolio manager at Invesco. "This is under the guise of a liability management transaction, and there is not a lot of transparency."
Proceeds from the deal, which is expected to be US$2.5bn-$3bn in size, are slated to fund the buyback of GDP warrants - a transaction that the finance ministry says could save the country some US$9.4bn.
"It is a noble idea in the sense you are not issuing net new debt, but it contradicts their very bold statements about not placing new paper in the market," said Alejo Czerwonko, emerging markets economist in the chief investment office at UBS Wealth Management.
"That may not resonate too positively with the investment community."
Even so, order books were building steadily, reaching around US$6.75bn by early afternoon after leads released initial price thoughts of 6.75% area on a 12-year tranche and 7.25% area on a 20-year.
Despite the buyside grumblings, Argentina's about-face may make little difference for investors who have renewed their hunt for yield as loose monetary policy across the developed world pushes rates ever lower.
"Post-Brexit, folks will look to other regions in the world for yield," Steven Azarbad, chief investment officer at Maglan Capital, told IFR.
"I think we will see greater appetite from investors."
Still, leads seemingly preferred to be cautious, refraining from excessive tightening to guide the 12-year at 6.625%-6.75% and the 20-year at 7.125%-7.25%.
Even at the tight end of those levels, pricing still offers a nice pick-up over the sovereign curve, where the existing 2026s and 2046s had been trading at around 6.15% and 7%, respectively.
Investors will also likely find some value in switching out of bonds trading at relatively high dollar prices into a new issue coming closer to par.
"I suspect investors at least want 7% [on the 20-year]," said Michael Roche, an EM fixed-income analyst at the Seaport Group, putting fair value on the 12 and 20-year at around 6.30% and 6.70% respectively.
"This search for yield is prompting investors to go up the yield curve."
Invesco's Newman sees more value in the longer-dated tranche, pointing out that even at 7%, the new deal would come at a G-spread of 472bp versus 466bp on the existing 2046s.
"The 20-year would look cheap to the 2046 based on those levels."
Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, and Morgan Stanley are acting as joint bookrunners. Expected ratings are B3/B-/B. (Reporting By Paul Kilby; Editing by Marc Carnegie)