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By Paul Kilby and Davide Scigliuzzo
NEW YORK, April 18 (IFR) - Argentina was well on its way to achieving pricing targets on its first cross-border bond in 15 years after order books on the multi-tranche deal swelled to over US$50bn on Monday.
Strong demand for one of the few emerging markets turnaround stories has raised expectations of a final yield of 7.75%-7.875% on a 10-year tranche that is anchoring the deal's pricing.
Argentina set initial price thoughts of 6.75% area on a three-year bond and 8% area on a 10-year. A five-year is offered at 50bp below the 10-year yield, and a 30-year at 85bp over it.
Investors and the sovereign have been in a tug of war over pricing ever since the new government of President Mauricio Macri said it would raise up to US$15bn to settle claims with holdout creditors.
The finance ministry has been gunning for an average cost of 7.5% across all tranches, while many on the buyside have insisted that an 8% handle was required on the 10-year.
But strong demand for a deal that saw over US$25bn in indicative interest even before books opened will almost certainly mean the 10-year will price inside 8%.
"It should have been 8% [on the 10-year], but technicals and demand will probably overshadow fundamentals," said Sean Newman, a senior portfolio manager at Invesco Fixed-Income.
If the sovereign wishes to hit its average 7.5% yield, it will have to print a US$2bn three-year at 6.5%, US$6bn five-year at 7.25%, a US$5bn 10-year at 7.75% and a US$2bn 30-year at 8.6%, Newman said.
Yields in the grey markets were already indicating demand at those levels.
The bonds were being quoted in the grey market early Monday at 6.60%-6.35%, 7.40%-7.15% on the five-year, 7.85%-7.60% on the 10-year and 8.75%-8.50%, according to a broker.
For investors who believe that the Macri government can tackle the country's high inflation and cut a fiscal deficit that reached 7% of GDP last year, such levels were still seen as attractive in light of the sovereign's upward ratings trajectory.
All three major rating agencies are expected to rate the deal Single B, allowing the country to cast off its default status and open the door to investors who would have otherwise been banned for buying such a distressed credit.
Even at 7.75% the 10-year offers a nice pick-up to comparable Single B credits in the region such as Honduras, the Dominican Republic, Jamaica and Barbados, which are trading on average with a 6% handle, said Newman.
"We are going to buy across the board," said a London-based investor.
"There is room for more spread compression. There's a lot of interest from crossover accounts, so there's sufficient demand out there."
Some buyside accounts continue to reserve judgment, however, noting that the Macri administration has yet to prove it can put the economy back on an even keel while winning more seats in Congress to pass structural reforms.
"Argentina is a crowded trade now," said Jorge Piedrahita, CEO of broker Torino Capital. "Pricing leaves you vulnerable to a downtick in the market. They seem to be targeting 7 7/8 or 7.75% on the 10-year, but I wouldn't buy the 10-year below 8%."
Pricing on the deal is expected on Tuesday. Global coordinators are Deutsche Bank, HSBC, JP Morgan and Santander, while BBVA, Citigroup and UBS are acting as joint bookrunners. (Reporting By Paul Kilby, Davide Scigliuzzo, and Daniel Bases; Editing by Marc Carnegie)