Last year started out looking grim for Colombia. With an escalating internal conflict, deteriorating public finances and two downgrades from Standard&Poor’s, Colombia was “held hostage by US investors and desperate for funding,” says Francisco Pujol, managing director of fixed income for Latin America at Morgan Stanley Dean Witter.
In February 2000, the lack of alternatives forced Colombia to the dollar market with a $500-million, 20-year bond paying an 11.75% coupon. Investors were demanding higher returns for Colombian risk and reducing their exposure to the country. “It was clearly an act of desperation,” says one banker. Adriana Ordóñez, head of external funding at Colombia’s Ministry of Finance, agrees. “It [had] been a very tough year for Colombia,” she says. “It was really hard for us to get fair pricing and enough funding to create liquid benchmarks in the dollar market.”
Prospects only worsened in April when S&P downgraded the sovereign outlook to negative from BB+/B when President Andrés Pastrana announced his intentions to dissolve Congress. He later retracted, but with Pastrana’s political coalition in shambles and a delay of IMF-mandated financial reforms, the ratings agency downgraded Colombia again in May to BB from BB+.
However a few months later, amid an abundance of Argentine and Brazilian short-dated paper, European retail investors were looking to diversify their high-yield investments. “There was not a lot of short-dated paper around from other emerging market issuers in euros,” explains Pujol, “and with an oversupply of three-year Argentine and Brazilian paper, European investors began to express interest in hearing more about Colombia.”
Morgan Stanley felt there was enough appetite to bring a small, short-term issue to the market, but advised the sovereign to lay some fundamental groundwork first. “We had to start from the beginning and build a curve,” says Ordóñez. To educate investors about the credit risk and explain the peace process designed to end Colombia’s decades-old guerilla war, she and Juan Mario Laserna, the country’s director of public credit, made presentations directly to investors in Europe that helped break down investor resistance to Colombia.
The issue was small and paid a hefty premium-MSDW launched the €200 million ($188.8 million), three-year bond into the euro market paying a coupon of 11%. But the bond opened the way for Colombia to raise a total of €850 million ($775 million) in four subsequent euro-denominated bonds and laid the foundation for Colombia’s euro yield curve. Pujol says the debut issue was priced to attract wary retail investors and to factor in both S&P downgrades.
Jean-Dominque Bütikofer, emerging markets fund manager for Bank Julius Baer, who bought both the ’03 and ’05 paper, says he was impressed by Colombia’s improved macroeconomic performance and attracted by the high coupon on Colombia’s debut issue in euros for the short-dated paper. “Colombia was an improving credit story and there was room for spread tightening,” he adds.
Simon Campbell-Boreham, head of emerging market fixed income sales for Banco Finantia in London gives Colombia’s efforts a thumbs-up. “A lot of people didn’t think Europeans would buy Colombia,” he says, “but there has been a consistent demand from Europe and the deal has held its price very well.”
The deal was oversubscribed and increased to €300 million ($283 million). Retail investors, mainly from Italy and Germany, bought 75% of the issue and 25% was placed with institutions. MSDW, convinced there was unsatisfied demand for Colombia, reopened the issue in July, increasing the total amount raised to €450 million ($423.5 million). While retail investors maintained their appetite for the high-yield issue, 30% of July’s €150-million ($140.5 million) subscription was placed with institutional investors such as asset managers and insurance companies.
Colombia’s Ministry of Finance found the bond launch particularly satisfying considering that the country had been forced to abandon plans for a debut euro issue a year earlier. “We knew we had to regain the European investors from the sterling, Deutschemark and lire-denominated issues we had done in the past,” says Ordóñez. But UBS Warburg and Paribas had tried to bring the sovereign to the euro market in 1999 and failed to overcome what Ordóñez calls “headline risk,” the news coverage of Colombia’s internal conflict.
Colombia managed to crack the euro market and attract a broad group of European investors, with Italians taking 56% of the issue, Germans 13% and 12% going to the UK. Offshore US investors accounted for 7% of the issue and investors in Switzerland and the Benelux countries made up the remaining 5%. “It was a critical transaction for Colombia,” Ordóñez says. “It created a new investor base and reopened the dollar market for other transactions.”
Encouraged by the success of the three-year issue, Colombia tapped the euro market again in October, with a €300-million ($264.7 million), five-year bond led by J.P. Morgan and MSDW, offering a coupon of 11.25%, which was reopened in November.