NEW YORK, April 21 (IFR) - In raising US$16.5bn in the largest emerging markets bond ever, Argentina finally ended its long-running legal battle with creditors and sloughed off its status as market pariah.
With its first bond deal in 15 years, Argentina raised enough to pay the approximately US$9.3bn owed to holdout investors and still had plenty of funds to spare.
The sovereign can now stay out of the international markets for the rest of this year and fully fund the targeted 2016 deficit of 4.8% of GDP.
Secretary of Finance Luis Caputo told IFR the country would be able to do so through local markets, new multilateral lending and in a “diminishing degree” through central bank financing.
“We will be very active in managing our liabilities, trying to achieve the most cost savings,” Caputo said, stressing that the development of local markets will be a priority.
But he declined to rule out another tap this year to pre-fund the country’s budget in 2017, when the government hopes to cut the deficit to 3.3% of GDP.
“If down the road we notice through reverse enquiry that investors’ demand remains high, and the price is right, we would pre-fund,” he said.
With US$69bn in demand, Argentina was able to win the tug of war with investors, many of whom said they would never buy into a 10-year from the sovereign with less than an 8% handle.
On the day, however, leads tightened talk on the 10-year, the centrepiece of the deal, by 50bp before pricing it at par to yield 7.50%.
Deutsche Bank, HSBC, JP Morgan and Santander were global coordinators, with BBVA, Citigroup and UBS as joint books.
The underwriters squeezed hard on the 30-year to try to reduce demand and cut overall borrowing costs, bringing it at 541bp over US Treasuries - tight to the 571bp on the 10-year.
The sovereign also added a short-dated but cheaper 2019 at the last minute that investors dubbed the “Macri” bond because they mature within the first term of the new president.
“[This tranche] suited our interest by spreading demand more efficiently along the curve and allowed us to scale back the initial size we had in mind for the 30-year,” Caputo said.
He said that decision “reflects our confidence that Argentina spreads are on a declining path”. Overall the sovereign achieved a weighted average yield of 7.20%, or an average coupon of 7.14% across the four tranches.
The short-dated tranche also helped soothe the nerves of some investors worried about the country’s history of political uncertainty, not to mention bond defaults.
Non-Peronist presidents - such as Mauricio Macri, who only took office in December - have struggled to stay in power very long.
Macri’s party is not the majority in Congress, where he had to work hard to win approval for the deal with the holdout creditors that paved the way for the new bond issue.
“[The shorter-dated] bonds are a way for some people to re-engage cautiously and capture some carry and income,” said Pierre-Yves Bareau, global head of EM debt at JP Morgan Asset Management.
Carl Shepherd, a portfolio manager at BNY Mellon, stayed out of the deal altogether.
“Macri has a lot of support at the minute, but when you are making such wide-reaching reforms, you can’t please everyone,” he said.
“There are no shortage of firebrand politicians who will promise a moon on a stick.”
Still, Macri has clearly restored some confidence with his determination to instill market reforms - and that has given the new bonds a boost in secondary trading.
Frenzied buying from accounts either unable to participate in Tuesday’s trade or those who received small allocations sent secondary prices soaring this week.
This included some offshore money that had left Argentina under the prior administration, with private banking accounts comprising over US$10bn of the order book, one banker said.
“People want to be associated with a trade that is migrating from populism to more sensible economic policies,” he said.
Paying litigant investors in cash raised in the capital markets - rather than through longer-term bonds - was risky but saved the country more than US$2bn, said Caputo.
“Negotiating a price of a potential payment in kind would have extended negotiations and inflated the interest bill,” he said.
“We knew we would be able to place the new bonds at a much better price than what holdouts were willing to pay for them.” (Reporting By Paul Kilby and Davide Scigliuzzo; Editing by Marc Carnegie)