When we previewed yesterday unexpected announcement that Argentina would join Mexico, Ireland and the U.K. in issuing a 100 year bond, just one year after emerging from its latest default, we said “we expected the potential yield of 8.25% to come down as the offering will likely be many times oversubscribed.” It was.
According to Reuters, late on Monday Argentina sold $2.75 billion of a “hotly demanded” 100-year bond in U.S. dollars, and as expected the surge for yield resulted in 3.5x oversubscription: the South American country received $9.75 billion in orders for the bond, which in turn lowered the final yield to 7.9% with a 7.125% cash coupon, from the initial price talk of 8.25% in what Reuters dubbed an “otherwise low yielding fixed income market where pension funds need to lock in long-term returns.” Luckily for those same pension funds, they never have to worry about returns on capital as there is zero chance Argentina will not default again in the next 100 years.
Meanwhile, courtesy of yield-starved investors around the globe, the Argentina government increased its overall 2017 foreign currency bond issuance target even more, to $12.75 billion from its previous plan of issuing $10 billion in international bonds, Finance Minister Luis Caputo told reporters in Buenos Aires, in large part to fund its soaring budget deficit. As Reuters notes, Argentina will tap international capital markets to finance a fiscal deficit of 4.2% of GDP. Caputo said Argentina has $2.6 billion in bonds left to be issued this year. The new paper could be denominated in euros, yen or Swiss francs. It is not clear if the remaining issues will be in 100 year or longer maturities.
The finance ministry hailed the success of the sale as evidence that Argentina had regained “credibility and confidence.”
Some were not convinced. “Implicitly, this shows market confidence that the government will be able to change the idiosyncrasy of the country and will end the borrow and default cycles. Will it?” said Edgardo Sternberg, Emerging Market debt portfolio manager at Loomis Sayles.
The market was similarly concerned as yield spreads on Argentine sovereign bonds over U.S. Treasuries widened 6bps, the widest in a month at 412 basis points. Argentina’s 2038 dollar bond fell 1.5 cents while the 2046 bond issue fell 2.6 cents. The 2032 par bond was down by 1.5 percent, as was the 2027 issue.
While the bond was massively oversubscribed, investors questioned the wisdom of investing for a such a long term in a country as volatile as Argentina.
“It’s awfully premature for Argentina to issue 100-year bonds,” said Jorge Piedrahita, chief executive officer of Puma Investments. “When you look back in history, I’m not sure we can find a 20-year period where Argentina has not defaulted.”
That bridge will be crossed in due course, meanwhile aside from the government, the biggest winners were Citigroup Inc and HSBC, who acted as lead book runners on the deal.
As for the locals, their reaction to the bond issue was bittersweet: many Argentines, with memories of the severe economic crisis following a 2002 default, took to social media to express their surprise, some with a touch of humor. One asked if Argentina would exist in 100 years, and another said at least cockroaches would pay off the debt.
Axel Kicillof, former finance minister who led negotiations with holdouts under populist ex-President Cristina Fernandez, accused Macri of saddling 10 generations of Argentines with debt.
Whatever lingering concerns, Argentina’s new president Mauricio Macri deserves much credit for pulling off what until just a few month many thought was impossible: in 2016, he ended a decade-long dispute with creditors that allowed it to re-enter global credit markets, even as Argentina lacks an investment grade rating with S&P and Fitch both rating the sovereign as Junk with a B with a stable outlook, while Moody’s has the debt at B3.
For now, courtesy of $19 trillion in excess liquidity created by central banks, the concept of “junk bonds” does not really matter. Soon, however, investors will be reminder just why this designation was created.
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