NEW YORK, Sept 23 (IFR) - Argentina is poised to issue its first euro-denominated bonds in 15 years as the sovereign continues its rehabilitation in the capital markets.
The country is expected to come with a relatively small dual-tranche trade that could reach around 1.5bn.
It will be Argentina’s third cross-border offering this year as it tackles hefty funding needs, having already raised US$19.25bn from its first year in the international debt market since 2001.
Investors like the government’s turnaround story. But with substantial requirements ahead, the administration of President Mauricio Macri needs to find alternative funding sources if it wants to ease supply pressures in its core US dollar market.
“It has become clearer that the pace of fiscal adjustment is going to be more gradual than originally expected and they will continue to need funding next year,” said Alejo Czerwonko, an emerging markets economist at UBS Wealth Management.
Finance Minister Alfonso Prat-Gay was quoted this week as saying that the country would not issue more than US$10bn-$15bn in international debt next year.
“If they are going to come back next year for another US$10bn-$15bn, they’ll want to start funding in different places,” said a New York-based syndicate manager.
While accounts have been receptive buyers of Argentine dollar debt amid a global hunt for yield, patience in the dollar market may wear thin should the government abuse its welcome there.
Several on the buyside were quick to grumble when the sovereign returned to the dollar markets in July despite promises to cap this year’s supply at the US$16.5bn it issued in April to pay holdout creditors and cure its default.
In an effort to widen its funding options, the government has been working to deepen its own local market. Talk of a possible renminbi-denominated Panda bond has also been making the rounds.
The euro bond market, however, seems like the most natural choice for a sovereign in search of new investors.
Not only is it one of the few markets that provides sufficient scale for the size Argentina needs, but the country should also receive a warm welcome in a market where even EM credits are trading at razor-thin yields.
The swap back to dollars would be extremely costly for a country that is still rated just B3/B-/B, but Argentina is expected to keep the proceeds in euros.
“The cost to swap Argentina risk would be prohibitive, but they have enough trade flows [with Europe] to justify keeping euros,” said the syndicate manager.
The sovereign is seeking a dual-tranche issue with one tranche likely to have a short to intermediate tenor and the other longer-dated. But pricing the bonds will not be straightforward in view of Argentina’s long absence from the euro market and the limited comps at hand.
“It’s a bit of an unknown with pricing,” admitted a banker close to the deal. “We’ve had lots of conversations with investors who look at it in different ways.”
The most obvious place to start is with some of the country’s legacy debt denominated in euros, namely the discounts due 2033 and pars due 2038. Those have been trading at around 6.7% and 7%, respectively.
Investors, however, are expected to provide a premium for bonds with no association to previous defaults, much like they did with its re-entry into the dollar market in April.
“The market is willing to pay a premium for a cleaner Argentina bond,” said Czerwonko.
There is still quite some distance between where the pars and discounts are trading and levels on euro-denominated bonds issued by investment-grade sovereigns from other Latin American countries.
Colombia, the most recent Latin American sovereign to have tapped the euro market, has 2026s being quoted at a yield of just 2.26%.
That spread differential between the two sovereigns in the dollar market - where Colombia 4.5% 2026s are trading at 3.28% versus 5.62% on Argentina’s 7.5% 2026s - could provide a good measuring stick in euros, say bankers.
Other market participants, however, feel that the divergent monetary policies in those markets weakens such arguments.
“The European Central Bank is still buying sovereign bonds and this impacts the whole euro space, so it is not a good idea to use the dollar market as a reference point,” Czerwonko said.
Syndicate bankers will have to tread carefully, especially as the sovereign plans to make regular returns to the euro market.
“They are looking to strategically position themselves for the next 10 to 15 years in terms of having a fresh liquid euro curve,” said the banker close to the deal.
Investor meetings start on September 26 with an offering possibly as early as Thursday through leads BBVA, BNP Paribas and Credit Suisse. (Reporting By Paul Kilby and Robert Hogg; Editing by Matthew Davies)