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LatAm Letter: Deal or no deal

Table Business Deal

With Latin American primary bond markets in a rather sorry state, we’ll start somewhere a little bit more cheery

How about…Argentina?

You read that correctly. Argentina brought good news at the end of last week, announcing it had reached an “understanding” on the “key principles” of a new deal with the IMF. Given the more than $2.8bn the country is due to repay the Fund on March 22, and the lack of available reserves to make this payment, this was warmly welcomed. Bonds rallied, alongside CDS, as short-term default risk plummeted — or so it seems.

Just how good was the news? Sorry to spoil the Malbec-laced party, but it’s still early days, as we looked into in this week’s lead story. The next steps — reaching a staff-level agreement and then having the IMF board approve the deal — already looked a squeeze. And then Máximo Kirchner, son of VP Cristina of course, resigned from his position as head of the ruling coalition’s lower leader in protest at the policy conditions outlined in the understanding with the Fund.

Right now there are more questions than answers. Will political shenanigans get in the way of a deal being reached before the March payment? What happens if Argentina defaults on its IMF loan? All sorts of possibilities are being posited, ranging from “nothing much” (which would be a slightly awkward precedent for the Fund) to something along the lines of a dollar-starved economic apocalypse.

Patrick Campbell at Eaton Vance perhaps summed it up best. “It is probably something that nobody wants to run the risk of finding out,” he told GlobalCapital.

In any case, whatever happens in the IMF negotiations, bond investors are settling in for a rough ride that is likely to end with a rather predictable destination: yet another restructuring. Moody’s could hardly have been more explicit this week.

“We expect that the IMF agreement will be insufficient to restore international capital market access and that Argentina will still need to restructure debt payments due to private sector creditors that start rising in 2024,” said the rating agency.

What were we saying about starting with some cheery news? Pour yourself a drink (stronger than a vino tinto this time) and read the full story here.

Primary blues

Not a week has passed this year without the LatAm Letter having to discuss the trials and tribulations of the primary market and subsequent secondary performance. On Monday it looked like we were in for more of the same. Chilean holdco Inversiones La Construcción (ILC) rather struggled on debut, despite a robust BBB+/BBB rating, pricing a below target $300m 10 year and getting stuck at a rather juicy looking 5%.

There followed more decent days for stocks and US Treasuries, so — reasonably enough, one would think — Brazilian steel company CSN decided it would try its hand with a new 10 year on Thursday. What’s more, unlike ILC and several other recent deals that have struggled to generate pricing tension, here was a well-known, easy to understand credit pitching a benchmark sized trade.

Yet we had written on Wednesday that the optimism generated by broader stability was only “faint”. And sure enough, after CSN set IPTs at 6%, the broader market came tumbling down in such a fashion that not even the Brazilian company’s renowned steel beams could prevent the fall.

The company did at least tighten a little bit, with guidance of 5.875% plus or minus 0.125%, but could not push to the tight end of guidance and sold $500m at 5.875%. Even some major investors who like the credit story and thought the pricing was attractive (with a new issue concession of over 25bp) told GlobalCapital they didn’t participate.

Who’s to say what’s attractive, after all? By Thursday, ILC’s 4.75% 2032s, re-offered three days earlier apparently cheaply at 98.051, were down to around 94.50 in secondary markets. Batten down the hatches.

Life could potentially be tricky, therefore, for two credits from the traditionally challenging sugar sector that are still out there. Guatemala’s Ingenio Magdalena (IMSA) roadshowed two weeks ago but has yet to appear, while Brazil’s Usina Coruripe began investor meetings on Monday. Both have previously tried to tap international bond markets — IMSA in 2013 and Coruripe in 2018 — but decided against it after wrapping deal marketing.

Finally, one other Latin American issuer braved this week’s markets, though CAF has for a long time been more relevant to SSA syndicate desks in London than EM syndicates in New York. Even the SSA market is treacherous terrain these days, and CAF could not tighten pricing on a $650m five year on Tuesday.

CAF’s Manuel Valdez told GlobalCapital that the issuer had decided to push through the volatility, and Lunar New Year holidays in Asia, because it wanted to tackle some “significant” maturities due this quarter.

Just how urgently other issuers want to tackle maturities of their own may determine whether they are willing to accept the ever-increasing cost of funding that the bond market is offering.

Have a great weekend, and do get in touch for a free trial to access all of GlobalCapital.



This is GlobalCapital's LatAm Letter written weekly by Latin America reporter Oliver West. If you enjoy it, sign up for free in a matter of seconds here and feel free to pass it on to colleagues and contacts.

The best of this week’s LatAm bond coverage:

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