Start of a New Era
Innovative liability management exercises; legacy Brady bonds cleaned up; prudent repayment of Paris Club debt; and record local currency deals in international markets. Jose Miguel Ugarte, Peru’s executive director of public credit, broke historic new ground in 2007.
From helping launch Peru’s biggest-ever sovereign issue with adept planning and exquisite execution – which has blazed a trail for fellow Latin American borrowers – Ugarte also took a major step last year towards fundamentally restructuring the country’s debt dynamics. All this in a poor nation with substantially lower tax and export revenues than the familiar liability management darlings like Brazil and Colombia earns Ugarte particular distinction.
In February last year, Peru waded into international market waters following a year-long absence and after investor fears over the economic policy direction of populist president Alan Garcia had cooled. Ugarte spearheaded a serious debt mop-up exercise with a cash tender and exchange for all outstanding Brady debt and 2012 globals. Peru invited holders of the 9.125% 2012s to tender for cash or exchange for re-openings of its $500 million, 8.37% 2016s and its $900 million, 8.75% 2033 globals.
The second part of the exchange involved all outstanding Brady bonds to be exchanged for a new 6.55%, 2037s benchmark, which amounted to $1.202 billion. “We felt maturities for amortizations in our debt portfolio between 2008 and 2017 were a little concentrated. Anticipating any potential future risk, we decided to do an exchange and reduce the concentration of repayments by allowing investors to exchange or sell their positions for 2012 bonds and Bradys,” Ugarte tells Emerging Markets.
The 2016s and 2033s were targeted since they were expensive and complemented Ugarte’s risk management strategy. “These bonds worked for our objective since this instrument amortizes for the last three years of its life, so it allows us to spread out maturities in three years instead of concentrating in one year.”
Ties That Bind
The new issue spreads over US Treasuries were kind to investors, coming in at 119bp for the 2016s, 163bp for the 2033s and 175bp for the new 2037s. This realistic acceptance of the premiums needed to court investors allowed Peru to boost the new cash composition of 2037s, making it a new liquid benchmark bond. Ugarte explains that this exercise also validates his proactive strategy of building strong relationships with investors, providing pro-market solutions to Peru’s debt burden. “I don’t believe in zero-sum games. We like to have strong and long relationships with investors. Whenever we define our objectives, we always get investor feedback,” he says.
Many funding officials may just have opted to exercise the call option on the Bradys, dismissing the complicated exchange. But this diligent deal has not only locked down long-term investor interest in the credit, but has also secured cheaper funding since the Brady prices were trading lower during the February issue, making a call at par more expensive. What’s more, the exchange of 2012s into 2033s has secured a long tenor cheaply since the spread difference between them was just 67bp.
In July, Ugarte hit the ground running once more, launching a landmark $1.5 billion sol-denominated 2037 bond. This was Peru’s biggest local currency deal in international waters, its largest new issue so far and the longest tenor for a domestic currency offering in Latin America – beating Brazil to the accolade. And if the deal was not historic enough, at a single stroke the proceeds of the issue fulfilled the prepayment of Peru’s $1.75 billion Paris Club debt.
The sovereign was able to access international markets locally by offering the bond domestically and via global depository notes (GDNs) though still under local law, similar to Mexico’s Mbono market. But due to the size of the transaction, it used a book-building operation via Citigroup rather than a local auction – a deal further challenged by the fact that the nuevo sol is not a Euroclearable currency. Ugarte explains he was initially apprehensive about the mechanics of the deal: “The transaction marked the beginning of a new era because we took the risk of not following the fashion of usual euro-dollar transactions like in Colombia and Brazil”.
But he need not have worried. The deal attracted $2.5 billion demand, beefing up the transaction to $1.5 billion – $500 million more than originally planned. What’s more, 40% of the paper was sold to foreign investors, many of whom were exposed to Peruvian risk and the neuvo sol market for the first time. “It’s a pinnacle of sorts and a win-win for the government. It’s a 30-year deal in local currency governed under local law. The sovereign takes no convertibility or transfer risk and can discharge its liability in Lima and pay in its own currency,” Chris Gilfond, co-head of Latin American credit markets at Citigroup in New York, tells Emerging Markets.
By shutting the doors on the country’s woeful debt history, Ugarte has spearheaded Peru’s campaign towards investment-grade rating with this transaction, subsequently earning the sovereign an upgrade from Moody’s to Ba2 from Ba3.
Not content with consolidating the country’s coupon payments, extending tenors and jumpstarting local markets, Ugarte now vows new reforms to boost the country’s creditworthiness and increase funding opportunities for local companies. “We need to improve our regulations to increase domestic competition further. I want to make settlement and clearing systems more secure. I also aim this year to create a repo market for government debt that would extend liquidity and increase the depth of our market,” he says.
With deteriorating external market conditions derailing new sovereign issues in Latin America this year, Ugarte’s mission to develop local capital markets is more important than ever.