Uruguay might have pioneered the structure of a global bond denominated in local currency but its deal in 2003 had built-in protection by being inflation-indexed. The Colombia transaction had no such thing.
The sovereign became the first non-investment grade Latin American issuer to sell a vanilla Eurobond in its own currency (though the bond was settled in dollars). At five years, it was also the longest local currency denominated global bond by an emerging markets credit at that time (Colombia has since done a 10-year deal).
The bond, which was lead managed by Citigroup, had four main aims: to reduce the country's dependence on external financing; to save costs by issuing a peso-denominated bond below the local yield curve; to diversify Colombia's investor base in the local market; and to achieve a more simple structure through which investors can access the local TES market.
It succeeded in all respects. The order book quickly reached $1.1 billion, allowing Citigroup to increase the deal's size to an equivalent of $375 million from $250 million. About 65% of the bonds went to US investors, with Europeans taking 30%. The remainder went to Latin America accounts.
In total, 86 international fund managers participated in the transaction, even though they were taking direct exposure to Colombian peso risk.
This was partly because a low interest rate environment and a weak dollar meant investors were searching for alternative ways to obtain higher yields. But the level of demand was also influenced by an improvement in Colombia's credit profile and the rapid strides made by its local market.
"The Colombian local market is very developed, which gives confidence to international investors," says Luis Carlos Nunez, a director at Citigroup, who worked on the transaction. He reckons the total stock of debt in the domestic market is more than $20 billion.
From a pricing perspective, the bond was issued at a 47.5 basis points discount to the local curve, exceeding expectations of 25bp. After the deal was launched, the local TES curve rallied by about 25bp, lowering domestic interest rates and giving a boost to the Colombian economy. Finally, the transaction was SEC registered and cleared by Euroclear and Clearstream.
Three months later, in mid-January, the issue was re-opened for a further $125 million, taking the bond's total size to $500 million equivalent. The tap was priced to yield 10.75%, 30bp inside Colombia's local peso curve and 12.5bp less than the original yield at launch of 11.875%. The deal also broke the market convention of re-opening at a discount.
Issuer: Republic of Colombia
Date of launch: November 9 2004
Amount: Ps954,244 million ($375 million)
Maturity: Five years
Coupon: 11.75%
Credit ratings: Ba2 (Moody's); BB (S&P)
Lead arranger: Citigroup