When Argentina needed to raise money last year, it could not easily convince investors to buy its credit. Though usually it is one of the busiest Latin American borrowers, with annual funding needs of around $10 billion, investors were not well disposed towards emerging markets generally. And Argentina, already at a low Ba3/BB rating, faced further possible downgradings. It had been hit by a recession, high funding costs, and a presidential election to be held in October. To make matters worse, in June Peronist party candidate Eduardo Duhalde spoke of not repaying all of the country’s debt. Though he quickly reassured investors that he did not mean that Argentina should default, a tremor of unease passed through the international bond markets.
Argentina struggled to meet its funding needs by issuing a domestic bond here and a small Eurobond there. But its most important source of funds, the US dollar market, was eVectively closed after its last bond in April 1999. Yet, on October 7 1999 the sovereign produced a $1.5 billion oVering at near impossible prices ranging from 250 basis points to 470bp over US Treasuries over a range of maturities. A $250 million guarantee by the World Bank made it possible. Argentina was the Wrst sovereign to beneWt from the Bank’s new policy-based programme, which will provide a total of $2 billion worth of guarantees to emerging markets borrowers.
The lead managers, Goldman Sachs and JP Morgan, designed a new structure that squeezed out maximum beneWt from the guarantee. The zero-coupon deal came in six tranches: priced between Libor minus 15bp and 470bp over US treasuries, and with maturities of between one and Wve years. The Wrst tranche carried the Bank’s guarantee, and thus a triple-A rating. Once Argentina repays this tranche in October 2000, the guarantee will be rolled over to the next tranche.
The five subsequent tranches received investment grade ratings from Standard&Poor’s (BBB), Fitch IBCA (BBB+) and DuV&Phelps (A/A/BBB+/BBB+/BBB+). The BBB+ rating is four notches higher then Argentina’s long-term foreign currency rating of BB. Only Moody’s was not approached because, unlike the other agencies, it will not give a higher rating to a country’s external debt than to its domestic debt.
The lead managers were careful not to put in place credit enhancements that would resemble the complex structures of Brady bonds, which carry unfortunate associations of forced restructuring. Instead, the structure is based on the fact that Argentina’s obligations to the World Bank carry preferred creditor status.
“The transaction capitalizes on the sovereign issuer’s higher propensity to repay the World Bank than creditors like you or me,” explains Richard McNeil, managing director of the capital markets group at Goldman Sachs.
Should Argentina default on the bonds, the World Bank will take over payments for 60 days. The credit agencies judged that Argentina will undertake the utmost eVort to repay the World Bank within this limit, so as to avoid a cut-oV from the Bank’s essential financing and from that of other multilaterals.
With this structure Argentina achieved its main goal – access to the market. “It also saved about 200 basis points over what it would have paid for an unstructured bond, and it also left enough breathing space to not rush into future issuance,” says Gabriel Bochi, vice-president, Latin American capital markets, at JP Morgan. “Another important achievement is the enlargement of Argentina’s investor base to include high-grade investors. We were able to place about two-thirds of the issue with investors who usually buy high-grade corporate issues. The remainder went to emerging markets investors and global funds.” The lack of liquidity that resulted from the small tranches was therefore not a drawback. In fact, each one of the six tranches was oversubscribed.
One minor drawback did come in the form of Argentina’s downgrading. In an untimely manner, Moody’s decided to downgrade Argentina from Ba3 to B1 just a day before launch. But, says McNeil, the downgrading was not entirely unexpected and didn’t cause the leads to price outside the ranges at which the bonds were already marketed.
