Optimism about Argentina bubbling over

By:
Rob Dwyer
Published on:

High-yield sovereign issuer sells a $2.75 billion century bond; bank valuations ‘hyped’ but room still seen to grow.

The Republic of Argentina, which is rated B3 by Moody’s and B by Standard & Poor’s, sold a $2.75 billion 100-year bond to international investors on Monday to confirm that appetite for Argentine investments remains remarkably strong.

Despite the fact that Argentina has defaulted three times in the past 23 years, the bookrunners, Citi and HSBC, built up nearly $10 billion of orders, although investors say there was some padding of the book. The bonds priced with a coupon of 7.125% to yield 7.917%.

Argentina’s finance minister Luis Caputo says the deal was possible because of “the world’s credibility and its confidence in Argentina and the future of our economy”.

The deal certainly makes a statement, but perhaps it is more about the frothy nature of emerging market (EM) debt as investors remain starved for yield in developed markets – especially as Argentina’s president Mauricio Macri’s reform programme faces a serious test in the country’s mid-term elections in October.

Katia_Bouazza-160x186

Katia Bouazza,
HSBC

Asked whether the weight of the bond’s statement was about Argentina or the wider market, Katia Bouazza, head of global banking Latin America for HSBC in New York, says: “I think it’s both.

“The market has a lot of liquidity and appetite, as well as enough high-quality investors with the confidence to put their money to work in Argentina. And, at the same time, it is a huge statement for a country that only two years ago didn’t have access to the international capital markets.”

It’s rare for an improving issuer to sell a 100-year benchmark and lock in its non-investment grade yields – although, admittedly, very few would have the option.

However, Bouazza says the sovereign issued the century bond to access a new pocket of investor appetite for long duration and avoid re-tapping its recently established benchmarks.

Investors say that at a yield of a little under 8%, the deal looks attractive to the sovereign despite its potential to win investment grade in a relatively short amount of time.

Ultimately, the sovereign didn’t have the luxury of being price sensitive about the rate as it had promised not to re-tap January’s benchmark deals and it needed to continue to fund itself in the international markets to cover a 2017 funding shortfall caused by the strength of the peso.

Meanwhile, this bond also confirms Argentina as the growth story for investment banking activity.

According to Dealogic, the leading 10 banks have generated $103 million of fees so far this year – which is a considerably faster rate than last year: $157 million for 2016, while in all of 2015 the top 10 banks generated just $52 million.

DCM

The lion’s share of these fees is, unsurprisingly, coming from debt capital market (DCM) transactions.

In 2016, 82.2% of IB fees came from DCM (on volumes of $37.4 billion). So far this year, the domination of DCM has lessened a little (to 70.1% on the back of $19.8 billion), but DCM is still the main money-earner for the investment banks.

According to Dealogic, the century deal has taken Citi and HSBC to $7 million fees so far in 2017, compared with $18 million and $12 million for all of 2016 respectively. In 2015, HSBC didn’t register on the list of IB fee earners, while Citi earned $5 million.

And it’s not just debt. The country’s equities have also been in high demand as investors see strong returns from Argentina’s improving economy.

In particular, the returns from some of the Argentine banks have been impressive: Banco Galicia is up by 57% year to date and Banco Macro is up by 42%. However, there is differentiation in the performance, with BBVA climbing by ‘only’ 8% in the same period.

Despite this uneven performance, much of the gains reflect wider positive sentiment on the country – such as the expected announcement that Argentina would be included in the MSCI EM index – before Tuesday’s surprising omission – according to a report by Credit Suisse.

'Hype'

The report’s lead author, Marcelo Telles, concludes that although these recent – and in many cases dramatic – gains have been driven by “hype”, there is still room for Argentine bank stocks to outperform.

“We see value beyond the hype [and] we estimate real FX appreciation and compression in sovereign yield alone explain around 30% of positive shares performance, which is close to the 34% positive performance of the Merval index in the same period,” writes Telles.

We see all Argentine banks in our coverage as still attractive investment vehicles to play the Argentina story and the beginning of the turn of the credit cycle, with real credit growth already back to positive territory though still low-single digit.”

Telles anticipates three-year compound annual growth rate of (USD-denominated) earnings per share at 9% (on average) for the banks he covers. He expect return on equities to decline to around the 25% level by 2019 as inflation declines to high single-digit levels, which he thinks is “still attractive enough to make up for the risk”.

On a relative basis in the region, Credit Suisse still has Peru’s Credicorp as the best risk-reward in the region, followed by the banking market of Argentina, then Mexico, Brazil, Colombia and Chile.