Argentina took a further step in its reintegration to global markets on Wednesday, selling €2.5bn of euro-denominated bonds as the search for yield continues to benefit emerging market sovereign issuers.
In its first visit to the euro market in 15 years, Argentina raised €1.25bn of five year bonds and €1.25bn of long 10 year notes.
Mauricio Macri’s economic market-friendly government has become a darling for fixed income investors — even has it has had to increase its primary fiscal deficit expectations for 2017 from the 3.3% it promised in January to 4.2%.
The need to finance the fiscal deficit means that such market access is crucial for finance minister Alfonso Prat-Gay, who has opted to take a slow but steady approach to reducing the deficit in order to avoid a short-term shock to the economy.
So far, bond investors — starved of yields in developed markets — have been accommodating.
“The gradualist approach to fiscal consolidation is the safest one politically, and has been facilitated by very accommodating markets,” said Gustavo Cañonero, former chief EM economist at Deutsche Bank and now partner at Grupo SBS, the Buenos Aires-based asset manager and investment bank.
“If Treasury rates were not at 1.5% we would not have had the option of being gradual.”
After announcing initial price thoughts of 4.5% for a new bond maturing in 2021 and 5.625% for a new 5.625%, bookrunners BBVA, BNP Paribas and Credit Suisse attracted some €7.25bn of demand. This allowed the leads to tighten guidance several times before launching each tranche at €1.25bn at final respective yields of 4% and 5.125%.
“It is very smart of Argentina to diversify their funding sources given the amount of debt they have to raise,” said the head of EM bond syndicate at one bulge bracket investment bank. “My only surprise is that they did not raise even more.”
The Argentine government has already captured $19.25bn of dollar denominated bonds on two different occasions this year, after reaching an agreement with holdout creditors in April. Bankers say the euro market was a natural area for expansion, while there are rumours that the sovereign is contemplating the issuance of a Panda bond.
Funding needs for 2018 could be as much as $15bn equivalent, depending on the success of the government’s tax amnesty.
In another show of investor appetite not just for yield and Argentine credit risk, but also for Argentine currency risk, mortgage lender Banco Hipotecario also announced a bond deal on Wednesday.
The bank is planning to raise $300m of peso-linked three year bonds via Deutsche Bank and Santander. The bond will be placed on Thursday.