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DEAL OF THE YEAR: Sovereign Liability Management

Jan 1, 2013

Republic of Uruguay UYP39.8bn New Issue, Tender & Exchange

Last April, Standard & Poor’s lifted Uruguay’s credit rating by one notch – returning the country to investment grade after a decade of its debt being rated as junk.

A great part of its return to form was due to a remarkable dollar-to-peso liability management operation in December 2011 of a size typically reserved for the largest sovereign LatAm issuers.

The operation allowed Uruguay to extend duration, de-dollarize its curve, reduce foreign currency and refinancing risk and provide liquidity to existing bonds. It also set a template for other sovereigns to follow.

"We were able to increase the percentage of local currency, execute at time of volatility [the US had been downgraded and the Greek crisis was intensifying] in a scenario that was complicated for local currency issuance, and we stuck with our objectives," says Azucena Arbeleche, director of debt management at Uruguay’s finance ministry.

In the first component of the operation, Uruguay sold 19.06 billion pesos ($1 billion) in inflation-linked 2028 bonds. The bonds priced at par with a 4.375% coupon and offered little new issue premium. Next, Uruguay carried out a cash tender for various US dollar and euro- denominated bonds, to buy approximately $1 billion with final maturities ranging between 2012 and 2036.

Finally, Uruguay offered to exchange the outstanding 5.0% UI Global Bonds due 2018 into a reopening of the 2028 to improve the liquidity of the new bond and diminish amortizations in 2018 – a high amortization year.

The final result was a new global inflation-linked 2028 bond with $1 billion coming from new money and $725 million from the exchange of global UI 2018. The sovereign also reopened the 2028 bonds later for $275 million in cash, bringing the total to the $2 billion-equivalent ceiling it had set.

Uruguay was able to up the portion of local-currency debt in its profile to 47%, while at the same time creating a UI benchmark in one of the region’s biggest issuances in local currency; it was also able to extend maturities and provide a blueprint for other sovereigns to follow.

Uruguay was rewarded with a BBB- rating in April from S&P and Baa3 (investment grade) from Moody’s in August. Fitch had a positive outlook on its BB+ rating as of December, one notch below investment grade.

Uruguay has continued its liability management process, swapping $800 million-equivalent in domestic peso-denominated and inflation-linked bonds in March. In November, it went after the long end of its curve, with an $850 million dollar bond exchange, which led to a new 2045 benchmark.

Arbeleche says Uruguay will remain opportunistic in the current market, but she stresses that the main focus remains on developing the local market and improving the efficiency of its peso and CPI-linked yield curves through a steady supply of local issues. LF

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