Argentina’s capital market rehabilitation hit a
dramatic high point when the country issued a landmark 100-year
bond just 14 months after emerging from its status as a
longtime pariah in the global debt markets.
The Argentine government raised $2.75 billion in ultra-long,
dollar-denominated debt in mid-June. The deal marked a
significant step in the country’s capital markets
turnaround under President Mauricio Macri. His pledges to
reform and reignite South America’s second-largest
economy have led enthusiastic investors to snap up tens of
billions of dollars in government and corporate debt since the
country’s return to the international credit
markets last year.
But as Argentina’s economy continues to
struggle, some are beginning to wonder whether the borrowing
spree is leading to a glut of debt that may test investor
"I’m definitely worried about the supply," says
Sean Newman, a senior portfolio manager at Atlanta-based
Invesco. "In the beginning of the year, we were in the
Argentina hype versus substance trade. Everybody was in a 'get
in long in Argentina’ mode. But economic
expectations are mixed and green shoots are barely emerging,
and we have not seen a lot of reform momentum.
It’s a classic Argentina dilemma."
Edwin Gutierrez, the head of emerging market sovereign debt
at Aberdeen Asset Management, describes the supply issue as the
"biggest negative" of Argentina’s story. "You are
kind of spoiled for choice when it comes to the amount of paper
out there and ways to play Argentina."
Deal of a century
The June bond sale put Argentina in a small class of
sovereign borrowers that have sold 100-year bonds, including
Mexico, China, Belgium, Ireland and the United Kingdom. The
bond was issued with a yield of 7.9%, allowing the government
to lock in a favorable interest rate for a country that has
defaulted six times over the last 100 years and lacks an
investment-grade credit rating.
The sale reflected bond investors’ aggressive
hunt for yield, as low global inflation pushes real interest
rates down to record lows and as the debt of several European
countries offers negative yields.
But it also pushed Argentina’s
dollar-denominated debt issues in the first half of 2017 to
more than $10 billion. That came on top of the $22.6 billion
that the sovereign issued last year, according to data from
Dealogic. Through August of this year, the
country’s sovereign issues had already reached $36
billion, in all currencies, while provincial issues totaled
$5.9 billion and corporate issues came to $6.5 billion.
Argentine bond prices were boosted in August when
Macri’s Cambiemos coalition had a
stronger-than-expected showing in a primary vote ahead of
legislative elections in October.
The electoral victory helped assuage investor worries that
Macri’s pro-market agenda might be derailed in
Congress, where the president’s legislative
priorities have faced challenges. But the showing by his party
and its allies now have investors betting he will be able to
forge ahead with plans to tame inflation and restore order to
the country’s fiscal accounts. The government is
aiming to reduce the deficit to 4.2% of GDP this year from 4.6%
"Because of their slow progress on fiscal consolidation,
Argentina is a serial issuer and that’s unlikely
to go away soon," Gutierrez says. "But if you take them at
their word that they will work to address the fiscal issue
after the election, that will help to mitigate the supply
Newman also is looking for concrete economic results. "The
reform puzzle should come together after October," he says.
More to come
The broader global context will also be a determining factor
in investor appetite for Argentine bonds. "There
aren’t many attractive investment opportunities
right now," says Alejo Costa, chief strategist at BTG Pactual
in Buenos Aires.
"Argentina still looks attractive, so the global context
helps and takes the edge off any potential glut. As long as
Argentina has a good story to sell, the buyers are going to be
there, either in local currency or in foreign currency," he
The sovereign issuer is expected to return to the
international markets before the year is out, likely in euros
or Japanese yen. Meanwhile, some Argentine utilities, energy
companies and other corporate issuers are expected to sell
bonds in the months ahead.
"A lot more issuance from Argentina could be a slight damper
on sentiment for corporate bonds," says Peter Wietrak, a credit
research analyst at Invesco. "But I don’t think
it’s going to be the key driver. It’s
really going to be the market sentiment and what
you’re seeing in terms of broad flows into the
Sources say the power transmission company Transener, a
subsidiary of Pampa Energía, could issue up to $500
million. Power generation company Central Puerto is also
considering a $500 million transaction.
"The utility space is certainly providing attractive
opportunities," Wietrak says.
Argentina is planning to hold a renewable power auction in
November, which could prove to be a good incentive for some
utility companies to raise money, he adds. "You are going to
see some of the companies that win these auctions come back and
tap the markets, either tap their existing debt or maybe bring
new debt or project finance debt to the market," he
Costa also expects activity from Argentina’s
oil and gas and banking sectors either later this year or in
the first half of 2018.
"Some of the banks have a very aggressive plan to increase
lending, some by as much as 50%," Wietrak says. "How are they
going to fund that increase? A big chunk will come from the
Even though he is concerned about supply, Gutierrez says to
take other data points into consideration. He notes
Argentina’s debt-to-GDP levels and that the spread
between Argentine and Brazilian yields is about 150 basis
"There is no way that Argentina should trade 150 points over
Brazil," he says. "I still think Argentina is a very cheap
credit. I think there is fundamental value even with the issue
of supply." LF