Argentina: Buenos Aires eyes return
Domestic funding only small-ticket, short-term; Sovereign’s status a hindrance
The Province of Buenos Aires is monitoring the international capital markets and discussing a potential return. Sources at the Government of the Province of Buenos Aires say that they expect that its improving fiscal position will feed into lower yields on its outstanding 2015 and 2021 bonds. With large social and physical infrastructure needs, the province is keen to raise large, long-term debt; with the domestic capital markets only able to provide small ticket, short-tenor instruments it is targeting re-entry to the international debt market.
"The PBA has always been in contact with investors," says the source, who declined to be named because the topic is politically sensitive. "However, it will only be possible to consider accessing international markets when the cost of that financing reflects the new fiscal situation of the PBA."
Since 2007 the province has introduced two new tax reforms and modernized its collection technology. Combined, these initiatives will lead to an increase in total tax revenues of 141% between 2007 and 2013, if this year’s projections are accurate. The province has also created a fiscal surplus in the year to July, for the first time during the current administration. The province’s debt-to-GDP ratio has fallen from 14.7% in 2005 to 9.1% in 2012 and is projected to fall to 5.3% in 2015. The debt-to-total revenues ratio has also fallen, from 130.6% in 2005 to 65.1% in 2012, and is projected to fall to 28.9% by 2015.
Buenos Aires last sold international debt in 2011, when it issued $750 million of B/B3 2021s. The deal, led by Bank of America Merrill Lynch and Deutsche Bank, priced with an 8.75% coupon to yield 11.25%, but since then yields have surged, not least because of the problems faced by the sovereign. Effectively frozen out of the international markets, the province has been funding itself locally. In May this year it rolled over a domestic debenture with a $216 million dollar-linked transaction, which was led by local investment bank Puente. The tenor was extended to 18 months. The yield for the 2013 transaction was 4.24%, which had fallen from 9% just a year before. The province clearly feels that domestic investors are pricing the stronger fiscal position more accurately than the international markets. "Given the significant improvement in the province we don’t see a correlation with the high yields," says a source. "When the market understands the fiscal situation the borrowing cost will go down, then we will welcome international financing." The source says when the province can price in single digits it will likely come with a new transaction.
However, it is not just investors that need to be convinced. Standard & Poor’s has the Province rated CCC+, which is the same as the sovereign, not least because it says discretionary tax transfers from the federal government have been "very significant in recent years". An investment banker is blunter: "They don’t have the market – the only [Argentine] provinces that could access the international markets are those that have a means of guarantee, such as royalties like [the province of] Mendosa. Buenos Aires is completely dependent on the sovereign – they are basically sovereign risk."
The province denies it is reliant on discretionary tax transfers and is seeking to change this negative perception: "It is not true," the source says. "The PBA has the fiscal solvency today to cover its expenditures with its own revenues and PBA does not require financial assistance from the federal government."