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Argentina’s domestic bonds offer little choice

Value hard to find among corporates; financials likely to be hit by heavier regulation.

Investors looking to gain exposure to Argentina through the high-yield corporate bond market while bypassing the legal uncertainty affecting the sovereign bond market will struggle to find value, according to a report by Puente, an independent Argentine investment bank.

The report’s author, Alejo Costa, head strategist at Puente in Buenos Aires, says there is little value to be found: “Argentine corporate bonds are still expensive considering regulatory uncertainty and weak economic prospects. The few solid credits, whose sectors are less constrained by local market policy, don’t offer attractive enough yields.”

Alejo Costa, head strategist, Puente

The analysis suggests that the sectors that offer best growth potential are those that are less exposed to government regulation and to domestic growth, which is expected to weaken. Export-oriented sectors such as agriculture and hydrocarbons have the best outlook, but Puente says this upside is priced in. “We prefer corporate bonds and hydrocarbon trusts to corporate credits,” says Costa. “Once risk is weighed in, provincial debt offers better value. Hydrocarbon trusts are also a safe alternative, with good carry but low default risk.” Default risk remains high for holders of the sovereign bonds. In April the holdouts rejected the Argentine government’s offer to pay them the same terms as the other bondholders – less than 15% of the $1.47 billion settlement that the hedge funds, led by Elliot, are seeking. The likely final outcome will be unfavourable to Argentina, and holders of outstanding bonds governed by Argentine law are predicted to see a fall in price of between 9% and 11%. Holders of bonds governed by New York law can expect to lose between 15% and 25%, depending on whether the Bank of New York Mellon is caught in the injunctions and, if so, whether Argentina can find a way to avoid non-payment.

Costa also offers a bleak outlook for Argentina’s financial sector. His analysis suggests that the impact of heavy government regulation creates considerable risk for the sector, with limited upside in terms of revenue. “We expect banks to remain profitable in the medium term, but government regulation on the lending rates and portfolio selection will put a cap on profits,” says Costa. In 2012 the Argentine financial sector posted its eighth consecutive year of positive earnings (PS19.5 billion – $3.8 billion). The banks were helped by higher financial intermediation and inflation, which made deposits cheaper.

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