Nothing sums up the current bullish attitude to the bond markets more than the Republic of Panama’s $500 million Euro-144A bond issue. Just a year ago its Brady interest reduction bonds (IRBs) were trading at 950 basis points (bp) over US treasuries and, when Moody’s and Standard and Poor’s assigned them a rating two months ago, it was at the sub-investment grade of Ba1/BB+. But after extensive marketing the new deal was a blow-out even after doubling in size.
BankBoston won the mandate because of its earlier association with Panama. Steven DeSalvo, managing director and co-head of emerging market debt syndication, says: “We’ve been marketing Panama for some time now. We acted as their adviser on their Brady bond restructuring, and were their ratings adviser. We saw a story in Panama that others didn’t appreciate until we brought the deal.”
It’s not an issue which dealers or investors would have been happy with even 12 months ago, yet after an extensive roadshow in Korea, Europe and all across the US, it flew. Investors were so hungry for the paper that the government decided to double the issue from $250 million just a couple of days before the end of the roadshow: “And we still had more [investors] on our books even after the increase,” says DeSalvo. “The deal was two to three times oversubscribed.”
Some 70% of the paper was bought by US investors, 19% went to Europe, and the rest to Asia, mostly to Korea: “The Koreans have been very big investors in emerging market debt of late, especially sovereigns,” says DeSalvo.
The five-year issue was Panama’s first public debt issue since a $25 million floating rate note in 1980, and offered a spread of 175bp over US treasuries at launch. This priced the paper at the tight end of the range of between 175bp and 210bp outlined by BankBoston at the start of the roadshow. With an issue price of 99.825%, the yield to maturity was 8.0755%. This offers investors a significant pick-up on recent investment-grade paper issued by other emerging market states. The Republic of Croatia’s inaugural five-year $300 million Euro-144A, rated Baa3/A-, was launched four days before Panama’s at a spread of 80bp over treasuries, at a yield of 7.1435%.
Despite the historically tight spread for the Panama deal, some of the syndicate members thought that it could have been more tightly priced: “It was a very successful deal,” says one. “But the lead managers seemed to view the initial spread guide as a formal limit, capping the pricing at a low of 175bp. It tightened to 150bp almost immediately after launch, which indicates what the market participants thought about the launch spread.”
BankBoston’s DeSalvo appreciates these concerns, but explains his bank’s actions as follows: “We priced the bond at the tight end of the talk range based on where other Panamanian debt was trading Bradys had come down to just over 200bp, and their floating rate note was at 185bp [an amortizing $400 million deal, issued to refinance debt in 1994]. So 175bp was a good price. And if you look at other emerging market bonds recently, virtually all have tightened in soon after the launch: Argentina’s 20-year $2 billion paper tightened by over 30 basis points within a week.”
According to another syndicate member, the trend of emerging market issues tightening straight after launch is not as applicable in this instance: “It certainly had some impact, but the real issue was the timing of the launch. When the roadshow finished, 175bp over was a good price. But they didn’t launch the deal until nearly a week later, and in that time emerging market debt tightened in even more.”
The spread appears to have settled now, although the exact mid-price figure varies from bank to bank. At the end of February, one syndicate member was quoting 153/154bp, whereas another’s stood at 160bp.
All the syndicate members contacted, however, were at pains to point out that the overall deal was a good debut for a state which had spent much of the last 10 years recovering from the debt crisis of the early 1980s. “They got an excellent rating, all things considered,” comments one syndicate member. “And investors were very happy with the yield. Some expressed an interest in extending the paper beyond five years, even being prepared to go out past 10 years, but were content with what was on offer.”
And despite the fact that Panama could have saved a fair amount of money had BankBoston tightened the spread at launch, the government is very happy. Says Guillermo Chapman, minister for planning and economic policy: “We believe the price was very fair. Panama’s issue is the largest and most tightly priced inaugural bond issue by any Latin American country since before the 1982 debt crises.”
The proceeds from the bond issue are “primarily for the refinancing of the external indebtedness of the republic,” says Chapman, and the bond is intended as a means of setting a benchmark for future sovereign and corporate bonds. Whereas the minister states that “Panama expects to be a player in the international financial markets judiciously, of course,” he does not mention any plans for an immediate return. And as one syndicate member puts it: “We don’t expect to see them again for a while; the $500 million raised this time should more than cover their requirements.”
