Bond issue: Record-breaking Chile
Larrain takes pride in overseeing the sovereign’s latest international bond. The timing was particularly impressive, coming as it did in early September amid choppy global markets, volatile on the back of bad news from the US and, worse, uncertainty from Europe.
Larrain says Chile had made commitments to investors during the roadshows for the previous year’s transaction that the country would return this year to support that transaction by adding extra liquidity. The SEC filing from the earlier deal had been for $3 billion, and with $1.52 billion issued in 2010, Chile could assess the development on the bond markets without attracting attention with a new filing.
"We didn’t need to issue but we had made a commitment to issuers last time who had been critical that Chile had been a one-shot-deal," says Larrain. "We could place at any time, and the work we needed to do was much smaller [than the previous year]. So we did this in complete confidentiality. We didn’t want it to be known [that we were coming to the market] because we wanted to decide the right moment. We took the decision on a Monday [September 5] and we placed on the Wednesday [September 7]."
Being an academic, Larrain was aware of the history of the country’s international bond transactions, which date back to 1822 when the newly independent republic (Chile won independence from the King of Spain in 1818) placed a deal with a yield of 10%. "We broke our own record," he says. "We got 3.35% all-in financing compared with 3.89% last year and we were told by our advisers [the deal was managed by Deutsche Bank and HSBC] that it is the lowest rate that any Latin America issuer has ever achieved. We were very pleased that we could place $1 billion in a transaction which was more than two times oversubscribed in a very complicated market, a market that was looking at possible recession in Europe and was shying away from risk. Our bet was that the markets would differentiate – that we had a very strong position."
Despite the overall yield being lower than the 2010, the spread over treasuries increased from 90 basis points to 130bp, while at the same time Chile’s credit strength arguably increased and the US suffered its rating downgrade. Does Larrain feel this increase in spread is justified? "There has been an increase in the sovereign spreads for many countries," he says. "Of course, you would like to push the premium down but ultimately the all-in is what matters. If I place when treasuries are at 3% and I get 3.9% like last year, and then this year I place when the treasuries are slightly over 2% but the premium has increased and we place at 3.35%, what do I prefer? The 3.35% rather than the 3.89%."
As well as following through on the commitment it made during the 2010 roadshows to return to the market this year, Chile returned to establish a new benchmark for other Chilean issuers. The sovereign also earmarked the proceeds as insurance against the possibility that the global slowdown turns into renewed recession. "It is part of the contingency plan we have been working on for the past four months in case we face a more complicated international scenario," says Larrain.
He has not made any further commitment to return to the international debt markets next year but says he is considering another transaction in 2012, and while another 10-year bond is most likely, he hasn’t ruled out five- or even 25-year transactions to establish new benchmarks for other Chilean issuers.