Almost exactly two years ago, in April 2014, Greece issued €2.5 billion in 5 year bond yielding around 5%, which was met with huge investor interest and ended up being 8x oversubscribed. Fast forward to today when another former shutout from global bond markets, Argentina, is in the FT's words, "on the cusp of one of the most anticipated comebacks in recent history, as the Latin American country ends a 15-year exile from the international debt market with a multibillion-dollar sale."
According to the FT, "initial pricing puts the yield on new 10-year debt at 8 per cent, with shorter dated three and five-year bonds yielding 6.75 per cent and 7.5 per cent respectively. Its 30-year bond is slated to yield 8.85 per cent."
As a reminder, the Latin American country has been locked out of global debt markets since defaulting on close to $100bn in 2001 while in the midst of recession. "The government’s subsequent battle with creditors who refused to accept a restructuring deal, including a fund managed by Paul Singer’s Elliott Management, led to a lengthy and rancorous fight in international courts that sparked a global effort to redesign the way that countries borrow money."
Argentina then officially redefaulted in 2014 as a result of its ongoing legal feud which prevent the country from repaying both normal creditors as well as holdouts.
However, last year's election of President Mauricio Macri’s market-friendly government ignited renewed investor interest in Latin America’s third-largest economy. Read: a scramble to obtain some yield, just like in the case of Greece. And since the dramatic change in sentiment meant Argentina would be once again able to roll over debt, it had little problem reaching an agreement with holdouts such as Elliott and repaying them in full, in what has been perhaps the biggest IRR for Paul Singer's hedge fund to date.
Investors are clearly excited at the opportunity to park other people's money and to pocket a roughly 7.5% coupon. "Argentina has one of the best economic policy teams in emerging markets and they have the potential to transform the economy,” said Anthony Simond, investment analyst at Aberdeen Asset Management. “They are still unproven so at the moment the country has to pay up to borrow, but we are positive."
Incidentally, this is identical to the prevailing sentiment that preceded the Greek bond issue .
And just like in the case of Greece, the preliminary demand for Argentina bonds is already off the charts: according to Reuters the total issue is already almost three times oversubscribed:
- ORDER BOOKS ON #ARGENTINA'S BOND SALE REACH AROUND US$40BN: SOURCES - RTRS
What happens next? According to the FT, "while some investors had expected the country to issue more than $18bn this year, Secretary of Finance Luis Caputo has said today’s debt sale will be the only one until 2017."
“It’s a complex issue to price,” said Simon Lue-Fong, head of emerging market debt at Pictet Asset Management. “You can look at existing Argentina debt or comparable issuers such as Brazil, Lebanon or Ecuador. But Argentina has been absent from markets for a long time and is about to issue a lot of supply so there is no easy comparison.”
The sale of debt, led by Deutsche Bank, HSBC, JPMorgan and Santander, will be used to pay holdouts and finance the country’s budget deficit.
So should you rush to demand an allocation to the Argentina bonds, or buy them at the open?
Well, if Greece is any indication it didn't take too long for the bonds to see their price cut by 25%. As the chart below shows, the same bond that was issued at a yield of 5% is now yielding just over 10%, at a price of 86 cents on the dollar.
Will Argentina's bond fate be the same? We will have the answer in about a year. For now, however, with central banks doing their best to rekindle animal spirits we expect that the final oversubscription on the Argentina bond issues will be well north of $50 billion before the books finally close.