The government of Argentina’s next president, Cristina Fernández de Kirchner, must issue a sovereign Eurobond to create a benchmark yield curve to encourage the country’s corporates to come to market, according to experts.
Ms Kirchner was elected president on October 28 and is due to assume office on December 10. Local commentators expect the country to enter the international financial community fully during her four-year term, for the first time since the economic crisis of 2001-02. However, there are a number of major hurdles to overcome before this can happen.
Experts say a sovereign Eurobond is important for the development of the country’s capital markets. Argentina has not issued one since June 2001, when it carried out a mega debt swap to extend the maturities on $30bn of public bonds. However, it faces a huge obstacle to placing a new Eurobond: the hold outs on the sovereign defaulted debt could take legal action to try to sequester funds raised by a sovereign Eurobond.
Crucial step
Pablo Albina, country head of Schroders for Argentina, says: “A sovereign Eurobond is crucial to develop a benchmark yield curve, but it’s hard to say whether it will happen during Cristina’s administration or not.”
During Ms Kirchner’s election campaign, her husband, former president Néstor Kirchner, and she repeatedly stated that they were not prepared to negotiate with the 24% of bond holders who rejected the restructuring of the sovereign debt in February 2005. And a US Supreme Court ruling on October 1 this year may have convinced them that they do not need to take this step. The judges ruled that the Argentine central bank’s foreign reserves held in the US are protected by existing legislation and cannot be seized by the holders of the defaulted government bonds to satisfy their claims.
Argentine commentators now think it is less likely that any funds raised by a sovereign Eurobond could be frozen in the US.
One leading Argentine investment banker, who asked to remain anonymous because of the government’s sensitivity on the matter, says: “The hold outs on the $100bn of defaulted sovereign debt are a bigger issue than extending the maturities of $6.3bn of debt with the Paris Club. It would be good for the government to make some progress in resolving this before attempting to issue a Eurobond. The legal situation still remains unclear.
“If the government issues a Eurobond without resolving this matter, the markets would have to price in the legal risk. Nonetheless, I think the country will issue a Eurobond next year.”
Argentina’s capital markets remain much more underdeveloped than those of other countries in the region, and the country has not benefited to the same extent as its South American neighbours from the large capital inflows to the emerging markets since the US subprime crisis. Argentina is one of the few countries in the world whose currency, the peso, has depreciated against the dollar recently.
Brazil has much bigger capital markets than Argentina despite its gross domestic product (GDP) being only four times greater (Argentina’s GDP is about $250bn, while Brazil’s is more than $1000bn).
Brazil has a mutual funds industry of $525bn while its neighbour has one of just $8bn. Brazil’s private pension funds amount to $212bn against only $30bn in Argentina. The total market cap of the companies listed on the Sao Paulo Stock Exchange at the end of August this year was $1090bn, compared with just $52bn for the Buenos Aires stock exchange.
Shallow markets
Mario Blejer, a former president of Argentina’s central bank, says: “It should be remembered that all of Latin America’s capital markets are shallow compared with Asia’s, for example. In general in Latam, total credit against GDP is 25% while in Asia it is 75% to 80%.
“However, Argentina’s markets are less developed than Brazil’s or Chile’s.
I think the country will re-enter the international financial system during Cristina’s four-year term. The government needs to engage in confidence building. More durable, transparent rules for the capital markets need to be put in place.”
Mr Albina says: “Brazil’s financial system is huge in comparison to Argentina’s, so I think it’s a bit unfair to compare the state of this country’s capital markets with Brazil’s. Argentina’s system shrank during the economic crisis of 2001-02. It has recovered slightly but is not as big as it was in the 1990s. I think it will take not two years, but 10 years for the country to create the right framework to develop its capital markets fully.”
Argentina put capital controls in place in 2005 because it wanted to isolate the economy from the international financial markets, says Mr Albina. Mr Kirchner’s government did it because it wanted a weak peso to promote economic growth and reduce unemployment.
Eurobond issues
A number of Argentine corporates issued Eurobonds before the subprime crisis this year (see table). Among the biggest were those by property developer IRSA for $200m in January and one by Petrobras Energía in Argentina for $300m in April, guaranteed by its Brazilian parent. The largest Eurobond so far this year was by gas provider Transportadora de Gas del Sur for $500m in April (see box below).
In a sign of the vulnerability of Argentina’s capital markets, at the end of October, Argentina’s Banco Macro pulled out of a $200m 2014 unsubordinated bond issue because of lack of investor interest. It is not clear whether Macro will attempt a deal again this year, although sources close to the issue say the subscription period was extended for 90 days.
Argentine commentators are convinced that Ms Kirchner’s government will reach an agreement with the Paris Club next year on extending the maturities of Argentine public debt held by its members. That is the key to restoring government-guaranteed export financing for US and European companies investing in Argentina, something that the Argentine government is desperate to achieve because it believes that high inflation in the country is mostly due to supply bottlenecks arising from a lack of investment.
The Paris Club is insisting that Argentina agrees to official oversight by the IMF before granting an extension of the maturities. The government was extremely reluctant to do this, partly because of clashes with the former head of the IMF, Rodrigo Rato, but seems to be developing a better relationship with the new head, Dominique Strauss-Kahn, and may allow some limited form of IMF oversight.
Argentina’s capital markets continue to suffer from the fallout of the country’s severe economic crisis, but a trailblazing Eurobond could help the country to re-enter the international financial community fully during the new president’s term in office.
TABLE: CORPORATE BOND ISSUES IN ARGENTINA, 2007
TRANSPORTADORA DE GAS DEL SUR’S BOND ISSUE
Argentina’s most important gas transportation and gas processing company, Transportadora de Gas del Sur (TGS), issued the country’s biggest corporate Eurobond for $500m in May this year.
Analysts say the company was fortunate that it decided to place the bond – whose main aim was to restructure its debt – before the subprime crisis. Argentine banking group Banco Macro had to cancel its $200m unsubordinated bond in October because of a lack of investor interest.
Gonzalo Castro Olivera, chief financial officer of TGS, which was privatised in December 1992, says: “Our company restructured its debt in 2004 and was left with about $900m in total. Since then, we have gradually paid it down.
“We issued the Eurobond to reduce our interest payments and to extend the life of the debt. It was six times oversubscribed.”
TGS, which is listed on the New York and Buenos Aires stock exchanges, has a market cap of 3.2bn pesos ($1.02bn). Holding company Compañía de Inversiones de Energía controls 55% of TGS and, in turn, is 50% owned by Brazil’s energy giant Petrobras and 50% by fund managers Ashmore Investment Management. TGS transports 62% of the gas in Argentina.
Moody’s assigned a B1 rating to TGS’s bond issue. Daniela Cuan, a senior analyst at Moody’s, says: “From an international perspective, this is a comparatively low rating but is not too bad for an Argentine corporate. TGS could be a very profitable company but has suffered from the freezing of tariffs on energy in Argentina since 2002.”
Before Argentina’s economic crisis, about 80% of TGS’s revenues came from the transportation of gas in Argentina and about 20% from the production of natural gas liquids. Today, 50% of its $450m of annual revenue comes from the transportation of gas – which is subject to price controls – and 50% comes from natural gas liquids, which are not subject to the controls.
TGS exports 50% of the natural gas liquids, mostly to Brazil. The company has increasingly concentrated on this business because it is unregulated and more profitable.
TGS says that it has only invested in the maintenance of its pipelines in Argentina because it has had little incentive to invest in new infrastructure while it is subject to the price controls. Recently, the government indicated that it would allow the gas tariffs to increase by 20% next year.
