Investors gorge on DomRep debt
July 13, 2018 |
Caribbean island prints $1.3bn in 2028s after orders were 3x oversubscribed, sources
Investors piled into the Dominican Republic's $1.3bn July 2028 bond sale on Thursday, gorging on an order book that was roughly 3x oversubscribed, sources told LatinFinance.
Sole bookrunner JPMorgan opened initial price talk (IPT) at 6.25% area, offering investors a pick up over the Caribbean island's existing sovereign debt. The Dominican Republic's 2027 bond was spotted at 5.7% in secondary markets before Thursday's new issue was announced, one DCM banker not involved in the trade said.
Roughly two days earlier (Tuesday), the same note opened at 102.5, equaling yield of 5.57% to 5.6% in secondary markets, the same banker said.
"I suspect, given this is the first sizeable new issue from LatAm in weeks, [the issuer] is going to have to leave something on the table for investors," the New York-based banker said.
An investor that spoke to LatinFinance, quoted the island's 2027s at 5.5%, while Costa Rica's 2025s were offering 5.2% this week.
"Costa Rica is the key comparable in my view," she said. "But it is important to note that Costa Rica's notes have performed well in recent weeks and DR's widened a touch."
While US-China trade rhetoric, FX volatility and a US equities sell off hindered LatAm spreads in recent months, she pointed out that the Dominican Republic's yield curve had improved in the last five days.
With orders piling in, JPMorgan set guidance at 6%, before launching at the same level. The new July 2028 paper was reoffered at par.
Three investors who spoke to LatinFinance before the trade priced all expected the Dominican Republic to tighten spreads, and two of the three found fair value between 5.8% and 5.85%, while the third settled for 6%.
"All things considered, volatility and all, I thought the numbers were spot on," one of the trio said.
The second of the three cautioned that investors may be overweight on Dominican Republic securities.
"The DR is one of the biggest overweight positions," the London-based portfolio manager said. "It is unusual given it is a relatively small credit, but the poor performance of the asset class as a whole, I can see why most overweight positions suffer."
The island's status as an oil importer weighed on the mind of the third bond buyer, who dubbed this as one of its "main fragilities," especially given the recent bump in the price of Crude.
"Current accounts can deteriorate with the higher oil price, but overall, the DR is a solid credit that's logged good growth," he said.
Investors overweight on Dominican debt take solace in the island's economic diversity. One of the three buyside sources is encouraged by the country's diverse economy when compared to other Caribbean islands that rely solely on tourism.
"Fiscal management is strong, monetary policy is strong," he said. "Tourism is a big pull, but you have a manufacturing industry that sells a lot to the US."
The same investor suggested the sovereign could have tightened from 6%, but reckoned the Dominican Republic was wise to keep it at guidance levels because of the dearth of new LatAm issuance.
"Coming out of volatility, these issuers that have the ability to tighten can give us an idea of demand," he said. "If they can tighten, this means there is some excitement in the market and a positive environment building."
The first investor said a frequent sovereign issuer like the Dominican Republic, served as an ideal bellwether to gauge appetite risk.
"They tightened [from IPT], so that means investors are willing to ask for allocations... this is interesting coming in a period of volatility," she said. "In my view, at these levels, in these conditions, take the money and run with it."
Cleary Gottlieb was legal advisor to the Dominican Republic, according to a statement from the law firm. The sale was the sovereign issuer's 15th cross-border bond in the last nine years.
In February, Ba3/BB-/BB- rated Dominican Republic sold more than $800m in 2023 local currency, Euroclear securities, along with $1bn in 2048 paper.
Market makers largely expected the Dominican Republic to return this year, but two sources heard rumblings the sovereign wanted to reopen the Euroclearable note.
A third banking source, however, suggested now was not the ideal time to test the market with a rare local currency bond. "I have heard this," he said about a potential 2023 local currency tap. "But a peso bond amid the choppy conditions might be a bit of a risk right now."
The island has reportedly logged greater demand for its Euroclearable note and one of the two banking sources did not discount the possibility of the Dominican Republic reopening the bond in the immediate future.
"I think it is going to happen... the demand is there," he said of the 2023 local note.
When the Euroclear and 2048 notes priced, the sovereign's 5.95% 2027 bond - first issued at par in January 2017 - decreased to 106 in early February from 110 in late January.
And amid the volatility at the time, the Dominican Republic's 2023 Euroclear note was just about 70bp wide of where its 2023 dollar bonds were spotted.