Galicia opens Argentina’s new FIG market

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Regulatory-driven tier-2 deal trades up; Brazil banks still prefer local funding.

Banco Galicia has become the first financial institution to tap the international bond markets under Argentina’s new president, Mauricio Macri.

In July, Galicia sold a 10-year, $250 million tier-2 Basle III-compliant subordinated note. Perhaps surprisingly, given the unorthodox management of the banking system in Argentina under Macri’s predecessor, Cristina Kirchner, the country is one of the few Latin American nations to have fully adopted Basle III regulations.

The subordinated transaction boosts the bank’s tier-2 capital, with absorption triggers turning the debt into equity should regulatory capital thresholds be breached. Moody’s, which rated the deal, notes: “The bank has a level of capitalization that allows more business penetration in the coming quarters. However its 9.4% tangible common equity to risk weighted assets ranks weaker than its peers.”

The complexity and low ratings (effectively capped by Argentina’s sovereign B3 rating) made pricing difficult, with no comparable outstanding benchmarks. Standard Chartered led the transaction, with Deutsche Bank and JPMorgan as bookrunners. 

Initial price

The banks opened initial price talk at 8% to 8.5%, before widening the yield to 8.625% at guidance. Galicia eventually reduced the initial target size of $300 million and priced at par to yield 8.25%. 

The relatively small size of the bond – especially compared with some of the very large deals that have been coming out of the country – was also viewed as a negative by investors, even those that can buy such low-rated paper.

Rodrigo Gonzalez, head of debt capital markets, Americas, at Standard Chartered, says the deal was a challenging transaction with which to open the markets for Argentine FIG.

RodrigoGonzalez 160x186
“It’s a single-B credit issuing a triple-C rated loss-absorbing instrument, so there was a fair amount of price discovery needed on the deal"

Rodrigo Gonzalez,
Standard Chartered

“It’s a single-B credit issuing a triple-C rated loss-absorbing instrument, so there was a fair amount of price discovery needed on the deal,” he says. “But besides the strength of the Galicia credit, investors see the upside. That’s a key selling point when selling Argentine debt today – the expectation is for bonds to continue to outperform in a positive cycle as the country addresses its economic and social issues.”

Before the transaction only 10% of the $34.4 billion volume of international bond deals had come from the corporate sector (including FIG). The rest comes from the sovereign and the provinces – with Salta and Chubut the latest provinces to sell international debt, with $300 million and $650 million bonds respectively in July. However, the secondary market performance of Galicia’s trade points to the investor appetite throughout the credit spectrum in Argentina. Galicia’s deal traded up at a spread of between 105 to 107 (based on an issue price of 100) shortly after the transaction closed – generating optimism that other banks could look at the international market as a viable funding source.

“You will have some other [Argentine] banks that will be losing capital recognition through old tier-2 bonds, and this is an effective way to replace that funding with Basle III-compliant tier-2. Galicia’s deal was priced attractively for investors and was still cost-effective for the issuer,” says Gonzalez. “Opening the international markets with a bond that trades up by more than four points in the secondary will help others to follow. Also, if we see Argentina continue to grow, we expect the local banks to be active participants in the very large infrastructure needs of the country, and that will also drive demand for dollar financing.”

Gonzalez is also looking to Brazil as a source of supply for Latin American FIG issuance. He expects one of the country’s leading banks to establish a three or five-year benchmark later this year as the country continues to tackle its economic challenges.

The sovereign’s bond in July re-established a benchmark. Brazil sold $1.5 billion of 30-year bonds that yielded 5.875% as bookrunners Deutsche Bank, Goldman Sachs and HSBC tightened pricing from guidance on the back of a $4.3 billion order book. However, despite the improving yield curves for Brazilian credits, it is unclear if the Brazilian banks will be tempted to issue at these levels. 

“The top-tier banks are still sitting on a lot of cash and they have access to the local markets, so they won’t come to the international markets unless the terms are cost-effective – even if they have refinancing needs,” says one DCM banker who is sceptical about international FIG issuance from Brazil in the near future. “Even when they were growing credit portfolios at 20% and if they had refinancing needs, they were very selective about when they tap these markets because they have such strong deposit-base funding and local alternatives,” he says.

Banks elsewhere in the region have also been actively using local rather than international markets. In the past month alone Mexico has seen local FIG issuance from Cabei, Inbursa, Actinver and Bancomer. In Chile, UF- (unidad de fomento) denominated transactions for Santander Chile and Banco de Chile reinforce the local flavour of the FIG funding strategy.

Elsewhere, Peru is a potential source of international FIG issuance – and not only because it still has a lot of dollar-denominated credit in its banking system and is the fastest growing large economy in the region.