The Republic of Colombia has long held the reputation of a trailblazer in Latin American public debt management. This year was no exception, as the country broke new ground in several ways, just as the curtains were coming down on global high-yield markets in June 2007.
The 2027 Global TES bond, equivalent to $1 billion in Colombian pesos, was issued to pay for a buy-back of short-dated and illiquid dollar bonds up to the same value. Innovatively, the TES bond was sold first through a Dutch auction, rather than leaving a long period for investors to tender their old bonds before the new issue.
“Our investors gave a lot of priority to knowing beforehand what kind of exposure to Colombia they would be left with. By offering them an opportunity to decide how much they wanted of the new bond first, they could come back and decide how much to tender of the old bonds,” says Julio Torres, general director of public credit and national treasury at the Colombian ministry of finance.
Bondholders responded favourably to this approach, says Eugenio Alarcon, director in the Latin America debt capital markets team at Deutsche Bank, which was joint bookrunner. “The total face value of eligible bonds was $4.6 billion, of which we retired around $850 million. This success rate was among the highest ever attained,” he tells Emerging Markets.
Right time
As market fears over credit conditions in the US were beginning to play out, the decision to raise the cash from the new issue before the buy-back also proved fortuitous, says Blake Haider, head of capital markets for the Andean region at the other lead manager, Citigroup. “Market conditions started really deteriorating and volatility was accelerating. The risk of more traditional liability management operations is that the market may sell off, so you may have attractive participation rates on the tender, but you don’t have all the cash for the buy-back, in which case you might have to amend the deal.” As it was, uncertainty surrounding the direction of the market made the opportunity to tender illiquid bonds to the government all the more attractive, and the lead managers did not even need to use an optional second day of tendering.
The most significant innovation, however, was the country’s first exchange that involved switching from foreign to local currency. As such, the deal was a key and successful test of Colombia’s ongoing strategy of reducing the public purse’s exposure to exchange rate fluctuations. “In recent years, we have moved from having 80% of our debt stock exposed to the exchange rate, to just 27%, and we want to pesify our debt further, while keeping a full dollar curve. So this transaction was both a very cheap way for us to increase the proportion of peso debt, and also to clean up the dollar curve,” Julio Torres tells Emerging Markets.
Double first
The 2027 Global TES was the longest maturity on a peso-denominated bond, and also the largest peso issue to date, with a favourable implied dollar-peso exchange rate for the government on the tender. The fact that the bond also priced flat to the 2020 peso TES showed the strength of investor demand, and allowed the government to extend the maturity of its obligations at no extra cost. The bond settles in dollars to allow international clearable status. According to Marcelo Blanco, managing director and head of Latin America debt capital markets at Deutsche Bank, more than 100 different investors bid for the bond, generating orders of $5.2 billion. “There were many who were buying Colombian peso debt for the first time, so we also helped the republic to diversify its investor base, which was another important aim,” adds Blanco.
Edwin Gutierrez, portfolio manager at Aberdeen Asset Management, was one of those who bought into the Global 2027. “We wanted to extend duration in our peso exposure, and we are confident that local pension funds are beginning to do the same, to provide a deeper secondary market for peso debt.”
According to Haider at Citigroup, around 8% of the bond was distributed to Latin American institutions, mostly in Colombia, so the issue should also help to develop the local bid. “Partly as a result of different tax treatment and other technical elements, yields in the Global TES market tend to be richer than onshore, so this should drive down the cost of issuing debt in the local market,” he observes.
Of course, points out Gutierrez, foreign investors would find it easier still to put money directly into the peso bond market if Colombia’s currency were fully convertible, and tax treatment in the local TES market were identical to that for the Global TES bonds. Torres acknowledges that, “in an ideal world, any investor anywhere should be able to invest in our TES instruments.” He explains: “That is our medium-term goal. In the short term, we will keep using the Global TES to cater for capital exposure in the international markets.”
Just a month after the republic’s launch, Deutsche led an issue by the City of Bogota for a 2028 global peso bond equivalent to $300 million, establishing the true benchmark qualities of the 2027 Global TES. As Haider at Citigroup points out, the ability to tap a foreign investor base in local currency with a long maturity will be particularly helpful to Colombian companies that earn most of their revenues in pesos.