Latin America's local capital markets are becoming more important sources of funding a point that was aptly demonstrated by the International Finance Corporation's Peruvian sol bond that was issued in June.
In a deal arranged by Banco de Credito del Peru, the private-sector arm of the World Bank became the first foreign borrower to issue a domestic sol bond. The ground-breaking transaction raised S/.50 million ($15 million) and carried a tenor of three years.
The deal was driven by the rapid changes taking place in Peru, according to John Borthwick, head of funding at the IFC. “Growth in the pensions industry is driving the need for diversification and good quality assets to invest in,” he says.
The bonds carry a coupon of 7.33% and were priced around 50bp through the government yield curve. The transaction was broadly distributed with 43% placed with pension funds, 42% with public institutions and 15% with financial institutions. The deal was more than two times oversubscribed.
The proceeds of the issue were swapped into floating-rate US dollar funds. The end-beneficiary of the swap is a Peruvian entity, which is able to hedge its foreign currency liabilities. The IFC worked on the transaction for two years.
The deal benefits the IFC in two ways. It allows the multilateral to diversify its investor base at a decent cost of funding. At the same time, the IFC is able to make its presence felt in the local Peruvian market with the intent of providing other products in the future. For Peru, the deal will help develop its nascent capital market.
“This ‘Inca' issue represents IFC's commitment to help client countries develop their domestic markets and expand access to longer dated and local currency fixed-rate funding and ease the risky reliance on foreign currency funding,” says Nina Shapiro, the IFC's treasurer.
“We have confidence in the capacity of Peru's financial institutions and investors to support the further development of the market, and we expect other local and international borrowers to follow our initiative. IFC intends to continue its loan and equity investments in Peru, and will also follow up with innovative structured finance transactions for IFC's clients in the local bond market, allowing them to raise funds with longer maturities and for larger amounts,” she adds.
The sol deal was inspired by the IFC's forays in the Colombian peso market – the first local Latin American market the multilateral issued in. The Washington institution offered its third domestic deal in Colombia earlier this year, two years after it pioneered the El Dorado market.
The Peruvian deal was issued under the IFC's new soles debt issuance programme of S/500 million. The Inter-American Development Bank and CAF, the Andean development bank, are considering following the IFC's lead in Peru. However, the difficulty in finding swap counter-parties will keep foreign issuance to a minimum.
Issuer: International Finance Corporation
Date of launch: June 25, 2004
Amount: S/.50 million ($15 million)
Maturity: Three years
Coupon: 7.33%
Credit ratings: AAA (Moody's); AAA (S&P)
Lead arranger: Banco de Credito del Peru