NASSAU, April 8 (IFR) - While tourists clad in flip flops and T-shirts enjoyed the sun and crystal blue waters of the Caribbean, bankers dressed in suits and ties attended to more serious business during the second day of the IDB meetings in Nassau on Friday.
Topics at hand included default concerns in Venezuela, the development of local markets and the execution of Argentina’s jumbo bond sale later this month.
Just as Argentina is poised to cure its long-standing default, attention is quickly turning to Venezuela.
The oil rich nation could soon face its own default scenario later this year when its state-owned oil company PDVSA faces some US$3bn in maturity payments.
“It risks making the Argentina look like a picnic,” Graham Stock, head of EM sovereign strategy at BlueBay Asset Management, said at a LatinFinance breakfast on Friday.
Whether the state-owned oil company can win some breathing space through a debt exchange that will satisfy current holders remains a moot point.
A successful liability management transaction that is positive from a net present value perspective for investors is likely to come with a high cost as amortization deadlines draw closer.
Many market participants agree however that the Venezuelan government will likely react to a default differently from the recalcitrant Kirchner administration of Argentina which was embroiled in a decade-long legal battle with holdouts.
The international infrastructure required to garner vital oil export earnings means that attachment risks are much higher for Venezuela.
“It was difficult for holdouts to attach assets in Argentina’s case,” said Stock. “In Venezuela’s case you have oil proceeds flowing through the US financial system, and PDVSA asset offshore. So it is more important for the sovereign to resolve (a default) to regain access to dollar flows.”
Venezuela stands in contrast to some other Andean nations such as Colombia and Peru which have been prefunding well ahead of amortizations amid concerns that volatility may quickly close market windows again.
Colombia has already covered the US$3bn it needed to raise in the international bond markets this year, through a dollar deal last September and a recent euro trade in March - its first in that currency in over 15 years.
Ana Milena Lopez, Colombia’s head of public credit, noted that diversification of a country’s funding base has become increasingly important in the current volatile environment.
Colombia, being an oil exporter, has found itself at the centre of this year’s sell-off, but has since seen its currency and other assets recover.
This has encouraged foreign investors to return to its local market in force, helping cut local rates by a good 100bp over the last month or so, said Lopez.
“We have gone from a risk aversion environment to a market where risk is back on,” said Lopez told IFR. “There has been significant inflows into the local markets over the last month.”
Argentina should benefit from the improved backdrop as it seeks to raise up to US$15bn through the sale of five, 10 and 30-year bonds.
One banker described this as a “transition trade” whereby the high-yield and distressed accounts that had bet on Argentina in recent years would hand over the baton to dedicated EM investors who had been underweight the credit.
“It is a huge investor base,” said a source who thought that the sovereign would have little trouble building a bulky enough book among EM investors - some of which have already shown a willingness in putting in multi-billion dollar orders.
That bodes well for the government who said it is targeting a 7.5% yield on the deal.
Taken as an average between all three tranches, that should be achievable, especially if the sovereign prioritizes the lower yielding short-dated tranches, the source said.
Guatemala has hired Bank of America Merrill Lynch to lead its first international bond offering in three years, the country’s director of public credit told IFR on Friday.
The country has congressional approval to go ahead with the new issue, which is expected to be around US$500m in size, Rosa Maria Ortega said on the sidelines of the IDB meetings in the Bahamas.
The Central American country last tapped the international bond markets in February 2013, when it raised US$700m through a rare 15-year bond that priced at a yield of 5%.
Those securities were trading on Friday morning at a cash price of 103.75-104.75 to yield 4.46%-4.36%, according to Thomson Reuters data. (Reporting by Paul Kilby; Editing by Davide Scigliuzzo)