Liability management: Convexity breaks Panama’s bonds
Debt exchange plans hobbled by bad timing, repeat performance and a fully tapped shelf.
Pity Panama, whose attempts to execute elegant liability management transactions have not gone entirely to plan.
Take the bond exchange, which Panama did in mid-January. The country’s debt was not trading well: there were a large number of rather illiquid bonds, most of which had been issued at high interest rates and were therefore trading unhappily well above par. With Argentina fresh in their memory, investors hate buying emerging market debt above par: they know that any restructuring is likely to be based on par value. In any case, high-par-value bonds have nasty convexity – their fall in price when yields rise is bigger than their rise in price when yields fall.
So Panama was advised by a series of investment banks that swapping old high-coupon debt for longer-dated lower-coupon debt was a very good idea – especially if the new debt came in the form of a large benchmark issue that would improve Panamanian liquidity and help define the country’s yield curve.
The first problem was that Panama took this advice only after reopening one of its old illiquid bonds, the 2034s, for $250 million in August. The deal brought the 2034s up to $500 million in total outstanding: still not enough to make it into the EMBI or to entice large institutional investors that require relatively tight bid-offer spreads.