Oil and gas company YPF raised $800m of seven year senior secured debt on Wednesday in the first true international new issue from an Argentine borrower since April 2021, and only the second since 2019.
Government-owned YPF attracted around $2bn of orders after setting initial price thoughts in the low 10% area for its proposed Caa3 rated January 2031s, according to one US-based investor that bought the deal. Leads Citi, JP Morgan and Santander then offered guidance at 9.75%, the number, before launching an $800m trade at 9.75%.
With no new international bond issues from Argentina since Pan American Energy printed $300m of six year bonds back in April 2021, and uncertainty over whether foreign investors were ready to return to financing the country’s borrowers, some bankers had struggled to predict where the deal would land. But once it was done, follow-on demand was strong, with the new bond quoted between 1.5 and two points higher in the grey market at Wednesday’s close.
“I was happy to get involved because YPF is a core Argentina fixed-income holding and I’m willing to give [new president] Javier Milei the benefit of the doubt,” said the investor on Wednesday evening. “Maybe they now think they could have priced tighter or issued more as it’s done really well so far.”
Still, given the scale of the challenge facing Milei in turning around the battered economy, single-digit yield for Argentine risk did not strike some observers as particularly cheap.
“People must be hungry for yield but I don’t know how 9.75% can be worth it for Argentina,” said one LatAm syndicate banker away from the deal. “Still, it is pretty interesting that they managed to get a deal away at this moment in time.”
The head of EM corporate debt at one major global fund agreed, saying they had turned the deal down because it was hard to be sure that Milei's proposals — although well received by markets — would work.
”Protests [against his reforms] are beginning but I think it's only just starting to dawn on people what is actually ahead of them,” said the investor. ”It doesn't make sense at this sort of level to step into something ahead of almost inevitable volatility. It's not like a 9% handle is particularly rare these days.”
The investor highlighted that even Colombia's Ecopetrol, far better rated and belonging to a far more stable country, had offered an 8% handle on its deal the day before, paying 8.45% for a 12-year.
”I'd much rather own Ecopet at those levels,” they said.
Lorena Reich, senior credit analyst at independent research firm Lucror Analytics, thought the new issue was “slightly attractive” versus the existing YPF curve, highlighting that it came around 125bp inside the unsecured YPF June 2029s, which have a similar duration. By comparison, there is a 200bp spread differential between YPF’s secured 2026s and its unsecured 2025s, Reich wrote in a research note.
Lucror spotted fair value for the new deal at around 9.5%.
Proceeds from YPF’s new issue will be at least partially used to finance a tender offer for its $364m of 8.75% April 2024s. Under the terms of the buy-back, bondholders can sell their bonds at par if they participate by January 19.
Encouraging but risky
Pan American Energy’s deal was previously the only new issue from Argentina since YPF’s electricity subsidiary YPF Luz issued back in July 2019. Since then, international bond market activity in the country has been otherwise restricted to debt swaps: the sovereign’s mammoth restructuring back in 2020; subsequent similar deals involving Argentina’s provinces; and a slew of corporate bond exchanges — many of which have been deemed as distressed by ratings agencies — as companies have sought to push out debt maturities.
President Milei has given investors encouraging signs since taking office in December, with a broad programme of economic reforms led by economy minister Luis Caputo and central bank governor Santiago Bausili. Both Caputo and Bausili are familiar faces in bond markets thanks to their senior roles in the Mauricio Macri administration of 2015-2019, and their previous careers at Deutsche Bank and JP Morgan.
But YPF’s deal is unlikely to herald the return of Argentine borrowers in force any time soon, with the future for the country still highly uncertain. And YPF is not typical of most Argentine issuers.
Indeed, with ample access to domestic markets and strong operational and financial performance, YPF has a “healthy” liquidity profile, according to S&P, which called this week’s deal “opportunistic”.
YPF’s 8.5% June 2029s had rallied from around 73.75 cents on the dollar when Milei won the election on October 22 to almost 91 cents on the dollar by the time the new issue was announced late last week, though they have since fallen slightly to around 90, according to data from MarketAxess.
After Argentina’s authorities proposed a wave of austerity measures and deregulation in late December, the IMF on Wednesday approved a $4.7bn disbursement from the sovereign’s $44bn programme, which will enable it to make a range of looming debt payments. However, as Capital Economics pointed out in a note on Thursday morning, Milei’s agenda faces implementation risks.
“Only last week, a court suspended his labour reforms, which were included in December’s wide-ranging emergency decree,” wrote Kimberly Sperrfechter, EM economist at the research firm. “While public discontent has so far been less severe than expected, this might well change over the coming months as the painful effects of Milei’s measures are felt.”