Chile made debt capital market history on Thursday, achieving the lowest ever yield for a Latin American sovereign, with a blowout $1.52bn bond, split between dollars and pesos.
Late on Thursday, the sovereign tapped the international bond markets for the first time in six years, launching $1bn of 10 year global bonds to yield 3.89%, a spread of just 90bp above US Treasuries. The dollar tranche was followed by a $520m equivalent deal in 10 year peso denominated bonds to yield 5.5%.
Investors flocked to the long-awaited capital-raising — even with the record-breaking tight pricing — buoyed by the scarcity value of Chile’s sovereign debt, the country’s clean debt profile and its strong credit rating.
In June, Moody’s upgraded the sovereign to Aa3 from A1, the highest in Latin America. Fitch rates the country as A and Standard & Poor’s A+. US high grade accounts snapped up the dollar bond and both tranches received $10bn of orders in total.
After embarking on a US roadshow early in the week, rumours were rife that the deal would be priced with a sub-4% handle. Anchored by an estimated $7bn order book for the dollar tranche, leads Citigroup, HSBC and JPMorgan secured aggressive pricing for the SEC-registered global notes.
The 90bp spread over US Treasuries and 3.9% yield took the shine off Brazil’s $825m retap on Tuesday, the lowest ever yield for a Brazilian sovereign bond. That deal triggered market cheers with a record-breaking 4.547% yield, a 150bp over US Treasuries.
"Brazil’s deal was great but Chile’s new benchmark has the wow factor," said a banker away from the deal. The sovereign has not needed to tap the global bond markets for the past six years as the finance ministry had been buoyed by revenues from its copper exports. Proceeds from the bonds will be used for reconstruction after the country’s devastating earthquake in February.
With no bonds issued since 2004, Chile’s outstanding yield curve is illiquid, so roadshow feedback, CDS levels and high grade European sovereign bonds informed the pricing guidance, said one investor.
A lack of consensus over Chile’s theoretical yield curve makes calculations over new issue premiums highly speculative. Nevertheless, the 2020 dollar bond should be seen in the context of state-owned copper producer Codelco’s 2019s that were trading at 3.95% mid-week, said a banker away from the deal.
On this basis, the sovereign priced its 2020s 6bp tighter, in line with the market expectations.
The illiquidity of Chile’s yield curve also set off the surge in orders for the primary market deal, as it provided investors with a opportunity to gain exposure to a liquid sovereign benchmark.
But the reaction was mixed. "US high grade buyers were attracted to this deal because it offered a pick-up to low-yielding US Treasuries — but emerging market investors were unenthused at the spread," said one emerging market investor that snubbed the deal.
Chile’s globally issued SEC-registered bonds are indexed to the local currency — as Brazil and Colombia have also done — quashing fears that the product was no longer viable, as volatile emerging market currencies are traditionally a risky play.
A banker away from the deal said that fair value for the peso paper stands at 5.82%, when comparing the equivalent 10 year Chilean peso government bond in the local market with the peso/dollar currency swap market. On this basis, the 5.5% yield for the global peso deal was cheap for the issuer, said another banker.
This week, finance minister Felipe Larrain said Chile’s capital raising heralds the sovereign’s intent to become a more active international issuer, in both dollars and pesos. The government’s estimated $8.4bn post-earthquake financing needs could be easily financed by the country’s $40bn war chest of international reserves and fiscal savings.
But the new centre-right administration has chosen to rely on a combination of taxation, new debt issuance, as well as savings.
US investors bought some 54% of the dollar tranche, Europe 29%, Asia 10% and the Middle East and Latin America 7%. For the peso tranche, 56% of investors were in the US, 33% Europe, 9% Latin America and 2% elsewhere.