“Don’t offer us debt Argentina” – Why we avoided $16.5bn bond issue

Argentina’s record $16.5bn bond offering to the market last month was not priced appropriately given the risks that surround the region, Scott Fleming, manager of the Kames Emerging Market Bond Fund has said.
The issue – which ended a 15-year hiatus for Argentina from the debt market – was the largest ever emerging market bond offering, with the B-rated country able to raise the debt via four maturities with coupons ranging between 6.25% for the 3-year issue, and 7.625% for the 30-year paper.
Despite the interest in the bonds, Fleming said parts of the issue (for example, the 10-year tranche paying 7.5%) offered an insufficient coupon given the uncertainties surrounding the country’s data, fundamentals and potential for further issuance.
“There are a number of risks facing some of the bonds,” Fleming said. “Firstly, Argentine data is sketchy. One of President Macri’s key reforms is to ensure the Argentine government’s statistics office is fit for purpose, but these reforms are only set to be completed at the end of this year. Until then – and potentially after – statistics will remain unreliable.
“Secondly, we see the fundamental backdrop as challenging. Whilst the new government is aiming for a balanced budget in 2019 it is currently just under 5% of GDP. Moreover, a current account deficit of 2.6% of GDP heightens vulnerabilities, with foreign direct investment unlikely to pick up unless broader fundamentals stabilize. Whilst there will be support and optimism for Macri’s administration, the $16.5bn debt raising isn’t sufficient to finance the fiscal deficit.”
Fleming said there may be better opportunities to allocate to the long-dated emerging market debt in future, but for now he said the challenges facing Argentina and other countries within South America posed too much of a threat to investors.
“30 years is a long time when it comes to Argentinian debt repayments, with defaults in 2001 and 2014,” he said.
“Given the social impact of electricity prices rising by 500% and inflation anticipated to be around 30% for the next two years, and the developing situation in Brazil (Argentina’s largest trading partner), there will be ongoing domestic tests of how cohesive the ‘Cambiemos’ political alliance can be. As such, we see more compelling risk reward opportunities in better rated emerging market debt elsewhere.”
However, while the long-dated bonds look challenged, Fleming said short dated paper may offer an opportunity to investors seeking higher coupons.
“So far, the best performing tranche is the 3-year bonds, which pushed up over 3 points,” he said.
“The market is right to maintain its enthusiasm for shorter dated bonds; Macri’s political authority will allow for the refinancing of these.”