Argentina tests bond buyers' limits
September 26, 2017 |
The Argentine government has been on a debt spree. With interest running high, corporate issuers appear ready to take the plunge. But can the economically troubled country keep the attention of global investors?
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 appetite.
“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% in 2016.
“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 issue.”
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 says.
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 asset class.”
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 says.
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 international markets.”
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 points.
“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