By Paul Kilby
NEW YORK, July 28 (IFR) - Trinidad & Tobago launched a US$1bn 10-year bond on Thursday, marking its first international deal in over two years as it struggles to close a fiscal gap caused by weaker crude prices.
With order books swelling to around US$3bn by late morning, the Caribbean nation was set to comfortably raise US$1bn despite concerns about the oil exporter’s deteriorating credit quality.
While broader markets were softer on Thursday as oil prices continued to decline, investors took a shine to a rare deal from Trinidad amid a positive backdrop for EM debt following several weeks of record inflows.
Initial price thoughts of high 4% caught the eyes of more than enough investors, even amid expectations that the deal would land at 4.5% after leads released guidance at 4.625% (+/-1/8).
“4.5% is fair,” said Sean Newman, senior portfolio manager at Invesco, who has been comparing Trinidad’s deal against double and triple B credits under ratings pressure.
This includes Oman (Baa1/BBB-) and Turkey (Baa3/BB/BBB-) which have 10-year bonds trading around or slightly above 4.5% in the secondary markets.
At that level, the sovereign provides a decent pick-up to its curve, where the more liquid 2024s were trading at around 3.60% on Wednesday.
After calculating for the curve extension, investors would be left with around 70bp to compensate them for a new issue concession and the threat of a downgrade to junk, said Newman.
Moody’s downgraded Trinidad to Baa3 from Baa2 in April, with a negative outlook, as low oil and gas prices impacted the fiscal strength of a country highly reliant on hydrocarbons for economic growth.
At the time, the rating agency forecasted a 2.5% contraction in economic growth for 2016 and a fiscal deficit of around 5% of GDP.
“Recurrent expenses were ramped up with a drop in oil revenues,” said Nathalie Marshik, a sovereign analyst at Oppenheimer.
“They have done some work (through asset sales and tax hikes), but they still have a significant hole to plug and that is why they want to issue a US$1bn.”
Marshik thinks the market should be pricing in further credit deterioration, but noted that the country’s bonds are well supported by local investors.
“The pricing is still investment grade and is not reflecting the risk of the credit,” she said.
The sovereign, rated Baa3 by Moody’s and A- by S&P, met investors earlier this week via Deutsche Bank and First Citizens Bank. The deal is expected to price later on Thursday. (Reporting by Paul Kilby; Editing by Jack Doran)