The most surprising thing about Argentina’s record bond sale isn’t that it issued $16.5 billion of debt while still in default. It’s that the country could have sold even more.
The bonds rallied in early trading, signaling strong investor demand and a turnaround in sentiment after Argentina’s $95 billion default in 2001 set off more than a decade of litigation and isolation from global capital markets. Finance Minister Alfonso Prat-Gay couldn’t help gloating a bit, telling reporters that with orders from more than 600 investors he could have easily issued double the amount.
The braggadocio is excusable when considering where Argentina was just a few months ago, burdened by anemic economic growth, inflation estimated at 30 percent and an overvalued currency that discouraged investment. The comeback was set in motion when President Mauricio Macri took office in December vowing to reignite the economy and settle lawsuits with holdout creditors from the 2001 default that had caused the country to once again miss payments, this time on restructured notes.
“Argentina has a good story to tell, with a very proactive administration that accomplished several important goals in a relatively short period of time,” said Marcela Meirelles, an emerging-market strategist in Los Angeles at TCW Group Inc., which has $180 billion under management. Her firm bid for the bonds. “They were attractively priced for a country with a remarkable transition to a market-friendly, pragmatic administration.”
Before the bonds were officially sold, they rallied in the so-called gray market, where investors can trade the debt on a when-issued basis. The 30-year bonds rose about 2.6 cents above the issue price, while 10-year notes were 1.7 cents above par, according to Jorge Piedrahita, the chief executive officer at brokerage Torino Capital in New York.
The successful sale was also a boon to Argentine equities, with the Merval stock gauge posting the world’s biggest gain as it surged 5 percent to a five-month high.
Investors put in bids for $68.6 billion of bonds, the Finance Ministry said in a statement. Two-thirds of the buyers were U.S. based, with 25 percent in Europe and the rest in Asia and Latin America. More than 340 investors attended meetings with government officials last week in London, New York, Los Angeles, Boston and Washington.
The sale set a single-day record for a developing country, and will enable Argentina to pay about $10 billion to settle with creditors led by billionaire Paul Singer who sued for full repayment after the default 15 years ago. A court victory by the investors had left Argentina unable to pay debt on its restructured notes issued in 2005 and 2010, sending the country into default once again in 2014.
Investors who measure their performance relative to benchmark indexes scooped up the bonds in anticipation of their inclusion in those gauges, according to Jean-Dominique Butikofer, who oversees $3 billion in emerging-market debt as head of emerging markets at Voya Investment Management in Atlanta. He said buyers of the shortest-term debt were likely to hold the notes to maturity, while the 30-year bond likely received the most demand from hedge funds and other more speculative investors.
Argentina sold $6.5 billion of 10-year bonds to yield 7.5 percent, $2.75 billion of three-year bonds to yield 6.25 percent and $4.5 billion of five-year bonds at 6.875 percent. The country also sold $2.75 billion of 30-year bonds to yield 8 percent, issuing them at a discount of 95.76 cents on the dollar. The sale had initially been put at $10 billion to $15 billion, with 10-year notes paying a yield of as high as 8 percent.
The average yield on notes due in about 10 years that share the securities’ B- rating from Standard & Poor’s is 8.89 percent, according to data compiled by Bloomberg. Argentina’s credit rating was raised to B3 from Caa1 by Moody’s Investors Service ahead of the sale.
"The credit rating increase has definitely opened the door for many funds that couldn’t invest in Argentina," said Edgardo Sternberg, a money manager at Boston-based Loomis Sayles, which oversees $229 billion in bonds including $16.5 billion in emerging-market debt. He said he put in orders for several tranches of the sale. "This added to the demand we saw from investors, which was huge. It looks like the country has the wind in its sails."
Argentina’s benchmark defaulted bonds due in 2033, which trade with accrued interest, gained 0.1 cent to 127.3 cents on the dollar as of 9:55 a.m. in Buenos Aires, reaching a record high.
The last time Argentina sold bonds -- issuing notes with a 15.5 percent coupon at 79 cents on the dollar in May 2001 -- the economy was suffering after a currency peg system that had helped tame inflation undermined growth. Seven months later, the country defaulted and abandoned its fixed exchange rate.
Isolation from international markets cost the economy $120 billion and meant losing out on 2 million new jobs that otherwise would have been created, according to Prat-Gay.
This time around, the country is benefiting from improving sentiment toward emerging markets, with yields near three-year lows as accommodative central bank policies fuel appetite for riskier assets. The sale brought issuance from developing nations to $18 billion this week, more than the previous 11 weeks combined, according to data compiled by Bloomberg.
"We went from questions over whether the deal would be successfully placed to investors knocking each other out in the desire to have an allocation,” said Patrick Esteruelas, an analyst at EMSO Asset Management, which oversees $2.8 billion. "Taking into account the unprecedented size of the deal and the absolutely gigantic and high-quality book that was assembled, I think I’d be hard pressed to describe this deal as anything other than a categorical success."
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