Peru garners 'massive' orders in $3 bln bond deal

Peru garners 'massive' orders in $3 bln bond deal

Asset Management Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Fixed Income Funds Peru Latin America Coronavirus

Peru stepped back into the sovereign cross-border market on Thursday, using its strong credit rating and track record of fiscal discipline to sell $3 billion in new debt with an order book ballooning above the $25 billion range, three sources familiar with the transaction told LatinFinance.

“The order book was simply massive. It reached at a peak above $25 billion, but we’ve had pricing tighten a lot since then, so not sure where it ends up. But massive,” said one banker working directly on the deal.

The $1 billion five-year tranche, maturing January 23, 2026, priced at 100.002, putting the coupon at 2.392%. The $2 billion 10-year tranche, maturing January 23, 2031, priced at 100.002, placing the coupon at 2.783%, market sources said. While the pricing was done, the final size of each tranche was not confirmed late on Thursday. 

“Peru is a rarity coming to the market, and it is high quality, so no surprise the order book was so robust,” a second market source said, adding: “This is a good sign in the last week that high quality names like Peru or Santander México are drawing strong interest. Liquidity however is still super thin, therefore the bounce higher in the markets have people questioning the move up. So still a lot of caution.”

“For well-rated sovereigns like Peru, the market is there and tolerating the new issue in this chaotic period,” the market source said.

Peru last came with a US dollar-denominated bond in June 2019, selling a 10-year issue with a 2.84% coupon at par. That bond traded down on Thursday 0.25 points in price to bid 102.25, yielding 2.59%, according to pricing data from MarketAxxess via Refinitiv. That puts it at 197.5 basis points over the benchmark US 10-year Treasury bond.

Pricing tightened significantly on Thursday as the order book swelled, with the initial five-year offering starting at US Treasury notes plus 275 basis points and the 10-year at 260 basis points. At the deal’s launch, the five-year tightened to 200 basis points and the 10-year to 212.5 basis points, the sources said.

On Tuesday, Santander México sold $1.75 billion worth of 5-year notes with a 5.375% coupon, breaking the cross-border ice for corporate borrowers in the Latin America and Caribbean region. That order book had swollen to $6 billion.

Peru, with an investment grade rating of BBB+ from S&P Global and Fitch Ratings and a notch higher at A3 by Moody’s Investors Service, pulled forward their debt issuance plans, said a third source with direct knowledge of the deal.

“This is being done for general fiscal purposes. They are coming sooner in the year than they planned because of the COVID-19 pandemic. Really they are being compelled to do it, but their credit issuing regulations don’t allow something specific for health-related reasons, so this is being done for general fiscal purposes,” said the adviser who works with governments in the region, requesting anonymity as they were not authorized to speak publicly.

Peru’s situation is no different from other nations, whether they are in or out of Latin America. The financial impact and loss of tax revenue is spurring deals globally. Some sovereigns have constitutional language in place that allows them to issue debt only for fiscal purposes while others can designate debt without needing special legislation as socially responsible credits. 

The strain on government budgets caused by the COVID-19 pandemic has some in the market looking to qualify deals as socially responsible.

“Bankers are looking to see if they can get these bonds qualified as ESG (Environmental, Social, Governance) type assets if they can be issued under guidelines tied to the fight against the pandemic. That designation would open up much broader universe of investment funds that are mandated to only buy those designations,” the adviser said.