Quasi-Sovereign Bond – Standing Out in a Crowd

The winner of the LatinFinance quasi-sovereign bond of the year is the €100 million three-year, fixed rate bond for the city of Buenos Aires, led by Chase Securities. “It was the tightest issue raised for an Argentine issuer behind the sovereign [last year],” says Santiago Bauscilli, an associate in Latin American capital markets at J.P. Morgan, the investment banking arm of the merged J.P. Morgan Chase&Co. The issue was the first time in three years that the city had sold an international bond.

Latin American quasi-sovereign issuance was sporadic in 2000, reliant on what Luc Cardyn, global head of emerging market syndicate at BNP Paribas in London, describes as a “window market.” Argentine local authorities were the most frequent quasi-sovereign issuers, raising $1.72 billion with 13 bonds, even when the market was hostile. Other Latin issuers were less active. Brazilian issuers raised $1.31 billion with four issues and Mexican issuers raised $1.92 billion with four issues for Pemex.

Abundant Argentine Issues
Despite an abundance of Argentine issues, the city of Buenos Aires deal was attractive to both investors and the issuer. The €100 million, three-year Euromarket bond, needed to finance the city’s funding requirements, was launched into the market with a coupon of 9.5% and a spread of 478 basis points over Bunds. By issuing in euros, the city was able to achieve a spread of 52 basis points over the sovereign spread, which when swapped into dollars, was less than 20 basis points over Argentina’s dollar curve. “It was an exceptional transaction from the cost perspective,” says Bauscilli.

It was the first euro-denominated bond in the Euromarket for the city of Buenos Aires and its first issue since 1997, when it raised a $250 million, 10-year 144A/fixed-rate Euro-bond and a peso-denominated, $150 million seven-year bond.

The combination of the short-term tenor and the 9.5% coupon on last year’s €100 million issue was very appealing to European investors, says Bauscilli. Italian retail investors bought 45% of the issue, Argentine pension funds took 20% and the remaining 35% was placed with retail accounts in Germany, Switzerland and the Benelux countries.

The city of Buenos Aires was able to come to the market at almost the same time as the province of Buenos Aires because of its excellent liability management. Unlike the province, the city has a fiscal surplus and is reducing its debt every year, says Bauscilli.

The province of Buenos Aires came to the Euromarket four days after the city’s issue on June 19 with a €100 million, four-year bond with a 10% coupon and a spread at launch of 512 basis points over Bunds, led by bookrunners Credit Suisse First Boston and J.P. Morgan Securities. Initially the seven-year issue was between €100 million and €150 million, but the bookrunners cut the size to €100 million and reduced the tenor to four years in the wake of the City’s bond.

Despite its high level of debt and the volatile market, the provincial government also later issued a €75 million, one-year fixed rate bond through bookrunner BNP Paribas. “It proved that well-timed, targeted transactions can be launched in the Euromarket in almost any market conditions,” says Christopher Drenner, head of public sector debt capital markets at BNP Paribas in New York.

A Timing Question
The deal was launched on October 18 when the markets were closed to Argentine borrowers and the Nasdaq composite index had dropped 8%. “We were trying to decide all day whether we should go to the market,” says Paribas’ Cardyn. “At one point the Nasdaq was down close to 10%, but at lunchtime in New York there was a massive rally so we went to the market at 4:30p.m. London time.”

Cardyn says it was possible to place the one-year bond for the province because there was very little liquid six- to 18-month paper available at a good price. The paper was bought up by money market fund managers and private banks looking for a liquid instrument, adds Cardyn.

Paribas’ Christopher Drenner says he expects “a waxing and waning of issuance” this year, as Latin American issuers continue to seize windows of opportunity. Latin sovereigns raised more than $4 billion in debt in the first 10 days of January with a $1.5 billion issue and a €1 billion, 10-year issue for Brazil, a $1.5 billion offering by Mexico and issues for Colombia and the Province of Buenos Aires. Argentina issued a $500 million add-on to an existing 30-year issue. “Borrowers will try and anticipate the market. They know from last year, the market can be closed for three or four months at a time,” says Cardyn.