Republic of Colombia
Issuance in local currency is a major theme in the Latin American borrowers’ awards this year. Pemex, GMAC Financiera and even supranational borrower of the year the Inter-American Development Bank all came to market with ground-breaking and innovative deals in local Latin currencies. But one borrower deserves to be singled out as being at the forefront of this particular trend, the Republic of Colombia.
Colombia was not the first sovereign to play the local-currency game – that was Uruguay. But it was Colombia that was responsible for taking the asset class from mere curiosity to trend.
Colombia’s first Global TES deal, which came to market for $375 million in November 2004, is still the first deal that those in the know mention when they want to talk about what a good idea issuing in local currency to foreign investors can be. It was a blowout deal, upsized relatively modestly from $250 million despite a book significantly larger than that generated by Colombia’s 10-year $500 million dollar bond in September.
The bond performed very well in the secondary market, but the real success of the deal was seen in the effect that this one $375 million bond had on the $25 billion local market for TES, as Colombian treasury bonds are known. The curve immediately tightened towards the global issue, bringing down the government’s domestic cost of funds and setting off a general repricing of Colombian risk.
“It gave a message to local investors that there was a different risk appetite”, and that foreign investors were more bullish on Colombian debt than the locals were, says Felipe Sardi, Colombia’s director of public credit.
Colombia has for the past few years had a strategy of aggressively prefinancing, and it had already raised all the money it needed for 2004 before it came with September’s global bond.
On the first day of 2005, then, the two bonds that Colombia issued at the end of 2004 between them accounted for $875 million of the new year’s $1.5 billion financing needs. That figure was quickly brought up to a round $1 billion in January, when Colombia reopened the Global TES for another $125 million; it then issued a second Global TES, this one maturing in 2015, for $325 million.
The country never needed to raise the $175 million that was left. The official financing need took into account an outstanding 2009 bond that was puttable back to the Colombian government at par in 2005. If investors exercised the put, it would cost Colombia $233 million. To nobody’s surprise, however, they didn’t, since the ’09s were trading at a dollar price of about 113 at the time.
The country’s strategy for 2005 takes the same lines as 2004’s: concentrate on developing the global TES curve, along with maybe one benchmark dollar issue. “The market wants more yield, the dollar is not a popular currency, and we want to reduce our foreign exchange exposure,” says Sardi.
The country also has a small syndicated loan programme, which raised $250 million in both 2003 and 2004. Sardi is not relying on it, however. “Historically, Colombia used to finance everything through banks,” he says. “Today, we continue discussions with banks on an opportunistic basis.”
And the country has proved itself capable of paying down expensive loans in advance – specifically a $1.25 billion emergency loan from the Inter-American Development Bank that was priced at 400 basis points over Libor.
“The emergency loan had 2006 amortizations of more than $300 million,” recalls Sardi. “The central bank admitted that they had more reserves than they needed, and the IMF agreed” – allowing the central bank to prepay the loan out of its reserves. The payment made a lot of sense: the loan was priced at 400bp over Libor, while the Colombian curve was about 280bp or less over Libor.
The central bank sold the government the dollars in exchange for domestic treasury bonds, and the government paid off the IDB: there was no effect on the local markets at all. And because Colombia was essentially trading dollar debt for peso debt, it reduced its foreign exchange exposure even further. No Latin issuer, it seems, is particularly keen on dollar debt these days.
