 |
"The sovereign needs to get this benchmark curve in place so that the provinces and companies can come to market"
Gerardo Mato, HSBC |
Leading players in Argentine capital markets say the government must issue a trailblazing Eurobond or global bond if the markets are to take off.
The country’s financial markets are more than 20 times smaller than those of Brazil, despite Brazil’s GDP ($1.17 trillion) being less than five times greater than Argentina’s ($250 billion).
Brazil has a mutual funds industry of $525 billion while its neighbour’s is just $8 billion. Brazil’s private pension funds amount to $212 billion compared with $30 billion in Argentina. The total market capitalization of the companies listed on the São Paulo stock exchange at the end of August this year was $1.09 trillion compared with $52 billion for the Buenos Aires exchange.
So far this year there have been 32 IPOs on Brazil’s Bovespa while in Argentina there have been just two listings on the Merval (electricity provider Edenor and banking group Banco Patagonia).
The number of companies listed in Buenos Aires (106) has still not recovered to the number before Argentina’s 2001 economic meltdown (125 at the end of 2000).
Leading investment bankers say the Argentine government must issue a Eurobond or global bond for the first time since 2001 so that a yield curve can be developed, which would provide a benchmark for issuance by the country’s provincial governments and corporations.
Gerardo Mato, HSBC’s head of global debt finance for the Americas, says: "The sovereign needs to get this benchmark curve in place so that the provinces and companies can come to market. The country’s current methods for raising financing means it is paying a premium to do so.
"This has become more of a political decision than an economic one. Argentina should keep all its financing options open, locally and internationally, which will help credit rating agencies’ and investors’ perceptions, in turn lowering the borrowing costs for financing. It is much better that the sovereign goes to the market when it is not desperate for financing. If it were to go in those circumstances, the markets would be very hard on it."
Some $7.5 billion of Argentine public debt matures next year and $9.2 billion in 2009.
Gabriel Martino, head of global markets at HSBC in Argentina, says: "Argentina’s central bank now has dollar reserves of $44 billion, so perhaps the country will not have to tap the international markets for its financing needs. However, it must do so if the country is to develop medium-term and long-term credit and debt markets."
According to the Argentine Institute for Capital Markets, part of the Merval, companies in the country raised a total of $24.1 billion on the domestic capital markets between 2002 and August this year, although some $10.5 billion of this total was for debt restructuring.
In December 2006, electricity distributor Transener became the first Argentine corporate since the 2001 crisis to issue a Eurobond, raising $220 million, according to Deutsche Bank.
It was followed by several other Eurobonds, including one issued by property developer Irsa for $200 million in January and one by Petrobras Energia in Argentina for $300 million in April, guaranteed by its Brazilian parent. The biggest Eurobond so far this year was issued in April by gas provider Transportadora de Gas del Sur, for $500 million.
Experts believe the government must resolve the issue of $6.3 billion of outstanding debt with the Paris Club before a sovereign Eurobond is feasible. The Paris Club’s members, especially France, are insisting that Argentina has IMF oversight before an extension on the debt’s maturities is granted. However, Cristina Kirchner, who looks set to be elected the country’s next president on October 28, explicitly ruled out IMF oversight on a recent trip to Germany.
One leading Argentine investment banker, who asked to remain anonymous because of the government’s sensitivity on the matter, says: "A bigger issue is the hold-outs on the $100 billion of defaulted sovereign debt. 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 will have to price in the legal risk. Nonetheless, I think the country will issue a Eurobond next year."
Joydeep Mukherji, head of the sovereign ratings group at Standard & Poor’s, says it would also be a good signal to international investors if Argentines began to return the $150 billion they hold overseas into the country. "When the upper- and upper-middle-class Argentines bring their savings back into the country that will be a very important sign," he says.
"They will be placing their faith in the country again. International sentiment towards Argentina could change very quickly but the government must stabilize expectations."
Experts say there was no lack of foreign interest in Argentine paper before the international turmoil in the money markets this year, and in fact what is really necessary is for the country’s private pension funds to start backing Argentine enterprise by buying corporate debt.
Sebastian Reynal, director in charge of corporate coverage at Deutsche Bank in Argentina, says: "Some 70% to 80% of the appetite for Eurobonds that have been issued by corporates in Argentina recently has come from international investors. It would be good for the development of the local capital markets to have a more balanced demand from foreign and local investors."
Michael Hartnett, chief global emerging markets equities strategist at Merrill Lynch, thinks the US Federal Reserve’s decision to lower a key interest rate by 50 basis points last month could benefit Argentina.
He says: "The decision is a green light for risk assets around the world. Merrill Lynch forecasts an investment ‘bubble’ in the fundamentally strong emerging markets. It’s essentially 1998 in reverse: the credit problem is now in the US rather than in emerging markets.