International investors were unsurprised by S&P Global Ratings’ recent upgrade of Paraguay, saying that they had anticipated the move ahead of an international bond sale that is expected to price this week.
“The rating now matches Fitch’s and Moody’s ratings for the sovereign,” said Bruno Rovai, sovereign strategist at Macquarie Asset Management. “The authorities are very focused on the next round of upgrades, which would take Paraguay to investment-grade levels.”
He added that “one of the requirements that S&P highlighted for such move is a deeper local capital market and a lower share of hard-currency debt.”
On Thursday, S&P upgraded Paraguay by one notch to BB+ with a stable outlook, citing the country’s economic stability and excess supply of renewable energy. This is attracting investors, which could help the country achieve sustainable economic growth and also reduce its fiscal pressure and debts.
“We expect pragmatic fiscal policy to result in a gradual government fiscal consolidation and stable debt levels,” the rating agency said in a report.
The Paraguayan government began calling investors on January 29 to price a proposed benchmark-sized deal in US dollars or Paraguayan guaraní, working with Citi, Itaú BBA and Goldman Sachs as the joint bookrunners.
Paraguay could price the two-part deal with a 12-year bond denominated in US dollars and a seven-year note in guaraní, according to information from Bloomberg.
Zulfi Ali, a portfolio manager at PGIM Fixed Income in New Jersey, said the upgrade should generate more interest in the upcoming new issue.
“With investment grade-rated credits generally trading at tight levels, investors are reaching for credits in the BB bucket,” he said. “Paraguay should see additional demand for their new issuance, especially from investors focused on higher quality within the emerging markets universe.”
According to Macquarie’s Rovai, this would be the first time that Paraguay prints global bonds in local currency.
Paraguay issued $500 million worth of 5.85% 2033 bonds in the international market in June last year after waiting for a market window to open at a time of rising global interest rates. Since then, the country has focused on raising funds in the local capital market or borrowing from multilateral banks for covering its financing needs.
Weeks prior to last year’s cross-border sale, the sovereign issuer sold $50 million worth of seven-year bonds to Eaton Vance in a private placement, marking the first time an international investor acquired notes in local currency.
Paraguayan President Santiago Peña said in an exclusive interview with LatinFinance in September that the country had set out an ambitious agenda to earn an investment grade credit rating during his tenure.
“Altogether, we welcome the sovereign taking steps towards securing investment-grade level ratings and see it as likely, however probably not materializing in the short-term,” Rovai asid of the goal.