El Salvador is looking to fixed income investors this month ahead of a long-awaited bond sale. It received congressional approval in November for a $550m bond issue, sources have told LatinFinance.
The Central American sovereign is in dire need of the cash to shore up liquidity levels and keep up payments to creditors. It has long sought a benchmark bond sale, but it has proved to be a source of political tension.
Sarah Glendon, the head of sovereign research at Gramercy Funds Management, said El Salvador’s opposition in the Legislative Assembly was contesting the governing FMLN party’s proposed budget. The opposition said the governing party had “omitted some expenditures and did not take into account the fiscal responsibility law, to which they had agreed,” she told LatinFinance.
The opposition threatened to take the issue to the constitutional court and Glendon said the planned $550m issue would prove an interesting pricing point, given El Salvador’s budget has not yet been approved.
Market uncertainty, owing to government divisions have caused El Salvador’s bonds to widen some 120bp in the last month. Its $800m outstanding in 5.875% 2025 notes were offering 8.2% in yield on Tuesday, after being seen around 7% in early January.
Glendon also said the government had sought approval for an additional $650m, but expressed skepticism it would win congressional approval.
“I think it is highly unlikely that they will receive authorization until they define exactly how they are planning to comply with the fiscal responsibility law,” she added.
Another development for investors was a possible bailout from the IMF. “Going to the IMF would be the best strategy to pay less for your bond,” a second investor that requested anonymity said.
El Salvador last year sought to tackle its debt burden by issuing local currency notes, or letes. However, local banks’ appetite for the securities has declined, forcing El Salvador’s government to sell $200m in Letes to the Bolivian central bank, sources said.
Last week, Fitch cut El Salvador’s credit ratings to B from B+ citing the political gridlock.
“The downgrade wasn’t unexpected as Fitch was two notches above everyone else so the most important thing is they didn’t downgrade two notches,” the same investor said. Moody’s rates the sovereign B3 and S&P Global Ratings rates it B.