Borrowers: Wait for the rate

As well as extending the maturity of its debt, diversifying the international investor base and developing its domestic treasury markets, the economy ministry has another important item on its agenda over the next two years - to press Argentina's case for an investment grade credit rating.

The ministry recognizes that, however efficient it is in accessing new markets and widening the investor base, the critical issue on funding costs will be the jump from double-B to triple-B, which typically allows a borrower to shave 100 basis points and more off the spread on its new issues.

Argentina's case for an upgrade is a strong one, since the country has low inflation, solid GDP growth, and a small budget deficit. However, its Achilles heel, as far as the credit analysts are concerned, is its poor showing in debt service costs as a percentage of total exports, where it flunks the test with a high figure of 45%.

But in spite of this one unfavourable number, under-secretary of finance Miguel Kiguel says Argentina compares favourably to other triple-B sovereign credits around the world.

Speaking at the National Convention of Banks 1997 meeting in Buenos Aires on May 20, Kiguel said "the basic macro-economicindicators would allow us to be investment grade," but added that "we think that the basis of our rating is not the indicators, but our history of past defaults".

Having acknowledged the heavy price countries pay for past defaults, Kiguel said it is vital Argentina keeps on course with its policies of growth with low inflation, and that the upgrade should not be far away.

He received encouragement from Massachusetts Institute of Technology economics professor Rüdiger Dornbusch, who told the same audience the convertibility plan was working well and remained the cornerstone of Argentina's economic reform programme. Be patient, was the essence of Dornbusch's message on the prospect of an investment grade rating. "The frustrating thing is that the rating services move slowly," he said. "It's like the way the Catholic Church makes saints."

But even if they are waiting for a sovereign investment grade rating, the prayers of the Argentine economy ministry were partially answered in late April, with the news that rating agency Standard & Poor's had decided that in dollarized economies it was now appropriate to abandon the traditional sovereign ceiling, and rate certain companies higher.

The announcement of this change in credit analysis procedures was accompanied by the immediate upgrade to investment grade level of a number of Argentine corporate names and banks, including Banco Rio and Banco Frances. And the list included domestic service companies, such as gas distributors Transportadora de Gas del Norte and Transportadora de Gas del Sur, and Telecom Argentina, as well as the more obvious export-driven companies like the oil company YPF.

In the immediate aftermath of the S&P announcement spreads tightened in on some issues to more like investment grade pricing, but many have since widened out as investors try to digest the implications of the new credit rating policy. Some of the corporates had been priced tighter than Republic of Argentina issues.

The economy ministry, which worked closely with S&P explaining the economic reforms in Argentina, was naturally pleased. "It was not a surprise," says Hugo Secondini, director of financial research at the ministry borrowing team. "In the case of Standard & Poor's I think they really get the idea of what is going on in Argentina, and they understand what convertibility means - that is why they have changed the way they see Argentina and some specific corporates in Argentina."

He adds: "The conclusions that Standard & Poor's reached are very important because they gave investment grades not only to companies that are selling commodities, like YPF, but also to companies in the service sector within the country. So you have to say that in one way or another this investment grade was awarded to the country itself."

But many emerging debt market players are not so convinced, and the S&P initiative has touched off a fierce debate among analysts and investors, and among the underwriters who now have to try and persuade investors to accept investment grade pricing on upcoming bond offerings.

The European rating agency IBCA was quick to reject the logic of the S&P move, saying in a statement that "a crisis which forced the sovereign to default would be so severe, and involve so much capital flight from the private sector, that it could severely damage the creditworthiness of banks and corporates even if formal restrictions were not imposed".

IBCA insisted it made no sense to rate banks higher than the sovereign, arguing that the commercial banks were particularly vulnerable to crises because their clients would have trouble servicing loans, and bad debts would eat into their capital.

So what happens next? In January IBCA had been hired to carry out a sovereign rating of Argentina, but at the time of the S&P announcement it specifically ruled out any possibility that it might rate any banks or corporates higher than the rating it awarded to Argentina.

But the economy ministry will be pressing hard to persuade other rating agencies to follow the precedent set by S&P, and win better borrowing terms for the private sector.

As for its own much sought after sovereign upgrade, officials hope this could come sometime within the next two years, assuming that economic plans remain on track. In the meantime, what one Argentine newspaper has called "the war of the rating agencies" looks set to continue this year. MM