Sovereign debt: Is Paraguay a frontier too far?

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Two recent Latin American sovereign issues suggest investor enthusiasm might be outrunning risk.

These days, international sovereign debt investors are constantly evaluating the markets for signs of bubbles. An investor speaking to Euromoney shortly after December’s Bolivian transaction was incredulous at the pricing that deal achieved – 4.875% for $500 million of 10-year notes for a country with no international DCM track record. His assessment of the bubble question was that specific deals were certainly being mispriced, with investors – awash with liquidity – looking too much at the yields on offer within a general environment of credit-strengthening in Latin America and not giving enough attention to bottom-up analysis of specific deals.

So it would have been interesting to witness the same investor’s reaction to Paraguay’s sale of $500 million of 10-year bonds. The Ba3/BB minus/BB minus trade priced inside Bolivia’s, at par with a 4.625% coupon to yield 4.625%, at the tight end of 4.625% to 4.75% guidance. That guidance had, in turn, been revised down from early talk of over 5%. Despite pushing hard on price, orders reached $5.6 billion before the bookrunners’ final squeeze on pricing. Even at 4.65%, 211 accounts participated.

They bought debt from a country that is poor (one-third of the 6 million population lives in poverty and GDP fell 1.2% last year – although the central bank expects a bounce of 10.5% growth in 2013), is politically unstable (just last year Paraguay’s president, Fernando Lugo, was impeached in what was described by many analysts – and neighbouring governments – as bordering on a coup), has a patchy record in tax collection and no track record in the international DCM market (the positive emphasis was placed on the upbeat term "debut").

True, these Latin American newcomers have strengthening economies, are in the main commodity-rich and promise to be run with an economic orthodoxy that should mean that servicing these relatively modest debts is not problematic. But real risks remain with these countries. And while these risks persist, are the rewards being paid on bonds from these new frontiers properly aligned?