Argentina Issues 100 Year Bond
20 June 2017 by Felipe Villarroel
Yesterday the Republic of Argentina issued a 100 year bond; the 2.75 billion tranche was denominated in US dollars, priced with a coupon of 7.125% at a price of 90.00 to give a yield of just under 8%.
Since President Mauricio Macri was elected in late 2015 the economic situation in Argentina has improved, and the medium term prospects for the country now appear to be significantly better than a few years ago. President Macri was elected on pushing through hard reforms, which were deemed crucial to regain investors’ confidence and once again allow the country to issue debt in international markets. We don’t need to remind people that Argentina has defaulted several times, the last time being a technical default brought about by a legal dispute with Elliot Management regarding the complex restructuring of Argentinian sovereign bonds that started in 2005 and completed in 2010.
A lot can be said about the long term prospects of Argentina, and as history tells us the political backdrop can change quickly, but what this transaction tells us is that the current hunt for yield is as fierce as ever.
Argentina is not the first sovereign to issue 100 year bonds; Mexico, Ireland and Belgium have all locked in super-long funding, as has government owned Petrobras. However, those issuers have all been investment grade rated (at least at the time of issuance), whereas Argentina is single-B rated. The problem here is that history is not on the side of investors being repaid their principal, at least not in the same form as they handed it to the Argentinian government; and there is a lot which can happen from now until the 28th June 2117 when these bonds mature. Of course we doubt that any investor plans on holding a 100 year bond to maturity; in fact it’s not the buyer’s decision anyway unless, God forbid, a major breakthrough in science allows human beings to have a working life of 100 years! But what investors clearly decided yesterday was to have an exposure to a single B issuer equivalent to 11 cents for every 1 bps move in yields, and one where the income in principal will repay the notional in just over 12yrs. Either way in our opinion it seems to be a very bullish trade and we see better value in other parts of fixed income markets.
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