Foreign Investors give Argentina a huge vote of confidence

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Foreign Investors give Argentina a huge vote of confidence

The most surprising thing about Argentina’s record bond sale this month isn’t that it issued US $16.5 billion of debt while still in default. It’s that the country could have sold even more as foreign Investors give Argentina a huge vote of confidence.

The bonds rallied in early trading, signalling strong investor demand and a turnaround in sentiment after Argentina’s US $95 billion default in 2001 set off more than a decade of litigation and isolation from global capital markets. Finance Minister Alfonso Prat-Gay couldn’t help gloating a bit, telling reporters that with orders from more than 600 investors he could have easily issued double the amount.

The braggadocio is excusable when considering where Argentina was just a few months ago, burdened by anemic economic growth, inflation estimated at 30 percent and an overvalued currency that discouraged investment. The comeback was set in motion when President Mauricio Macri took office in December vowing to reignite the economy and settle lawsuits with holdout creditors from the 2001 default that had caused the country to once again miss payments, this time on restructured notes.

‘Good Story’
“Argentina has a good story to tell, with a very proactive administration that accomplished several important goals in a relatively short period of time,” said Marcela Meirelles, an emerging-market strategistat TCW Group Inc., which has US $180 billion under management. Her firm bid for the bonds. “They were attractively priced for a country with a remarkable transition to a market-friendly, pragmatic administration.”

Before the bonds were officially sold, they rallied in the so-called grey market, where investors can trade the debt on a when-issued basis. The 30-year bonds rose about 2.6 cents above the issue price, while 10-year notes were 1.7 cents above par, according to Jorge Piedrahita, the chief executive officer at brokerage Torino Capital. The bonds continued to rise when they started trading in the market. The 10-year bonds climbed to 2.3 cents above par in Buenos Aires.

Investors put in bids for US $68.6 billion of bonds, the Finance Ministry said in a statement. Two-thirds of the buyers were U.S. based, with 25 percent in Europe and the rest in Asia and Latin America. More than 340 investors attended meetings with government officials last week in London, New York, Los Angeles, Boston and Washington.

Creditor Payment
The sale set a single-day record for a developing country, and will enable Argentina to pay about US $10 billion to settle with creditors led by billionaire Paul Singer who sued for full repayment after the default 15 years ago.

A court victory by the investors had left Argentina unable to pay debt on its restructured notes issued in 2005 and 2010, sending the country into default once again in 2014.

Rating Boost

Argentina sold US $6.5 billion of 10-year bonds to yield 7.5 percent, US $2.75 billion of three-year bonds to yield 6.25 percent and US $4.5 billion of five-year bonds at 6.875 percent. The country also sold US $2.75 billion of 30-
year bonds to yield 8 percent, issuing them at a discount of 95.76 cents on the dollar. The sale had initially been put at
US $10 billion to US $15 billion, with 10-year notes paying a yield of as high as 8 percent.

The average yield on notes due in about 10 years that share the securities’ B-rating from Standard & Poor’s is 8.89 percent,
according to data compiled by Bloomberg. Argentina’s credit rating was raised to B3 from Caa1 by Moody’s Investors Service
ahead of the sale.

“The credit rating increase has definitely opened the door for many funds that couldn’t invest in Argentina,” said Edgardo
Sternberg, a money manager at Boston-based Loomis Sayles, which oversees US $229 billion in bonds including US $16.5 billion in emerging-market debt. He said he put in orders for several tranches of the sale. “This added to the demand we saw from investors, which was huge.

It looks like the country has the wind in its sails.”

Market Return
The last time Argentina sold bonds issuing notes with a 15.5 percent coupon at 79 cents on the dollar in May 2001 the economy was suffering after a currency peg system that had helped tame inflation undermined growth. Seven months later, the country defaulted and abandoned its fixed exchange rate.

Isolation from international markets cost the economy US $120 billion and meant losing out on 2 million new jobs that otherwise
would have been created, according to Prat-Gay.

This time around, the country is benefiting from improving sentiment toward emerging markets, with yields near three-year lows
as accommodating central bank policies fuel appetite for riskier assets. The sale brought issuance from developing nations to US $18 billion this week, more than the previous 11 weeks combined, according to data compiled by Bloomberg.

(The following article was written by Carolina Millan, Katia Porzecanski and Chiara Vasarriand was published in Bloomberg on April 20, 2016)
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