NEW YORK, May 29 (IFR) - The Province of Buenos Aires may have to pay more than it expected when it taps the international capital markets amid Argentina’s ongoing legal dispute with holdout creditors.
The regional government, readying its first international bond in three years, may need to pay an interest rate of up to 13.5% to lure buyers in to the deal, say bankers and investors.
While local press reports have the province targeting a yield of around 12% on the 10-year issue, investors and traders are doubtful it can achieve such tight pricing.
The province’s outstanding 2015 and 2021 notes are already trading above that threshold, making it less likely that accounts will take up a longer-dated note at a lower yield.
“The talk was around 12%, but that is too tight relative to where they are trading now,” said one trader, who had the 2015s and 2021s quoted at yields of 12% and 12.5%, respectively.
Taking the 2021s as a starting point, and considering the spreads at which the province trades above both the sovereign and US Treasuries, investors put fair value for a new 10-year bullet at around 13.5%.
With slightly more than US$1bn in debt coming due next year, the province is widely expected to combine the new issue with a tender offer on its outstanding 2015s.
“I think it would be difficult for them not to buy back some of the 2015s,” said Sean Newman, a senior portfolio manager at Invesco.
The issuer could lower the yield on the new notes and offer to pay a high cash price to holders of the 2015s who agree to switch into the new securities, bankers say.
However, while the strategy could provide more flexibility in pricing the new bonds, it risks discouraging investors not already holding some Buenos Aires paper.
“A high-cash price tender could work for those who own the 2015s, but I wouldn’t be enticed otherwise, especially if I could buy a shorter-dated bond at a higher yield,” said Marco Santamaria, a portfolio manager at AllianceBernstein.
At the right price, however, appetite appears strong.
“I would certainly look at it,” said Santamaria. “We have concerns about the Argentina risk in general as the harvest season comes to an end and economic policy remains uncertain, but some of the provinces are in decent shape.”
Timing is key. Headline risk could hit secondary prices if the US Supreme Court rejects Argentina’s petition disputing earlier rulings that favored holdout investors. That decision could come as soon as June 12.
“The window is somewhat smaller than it was a month ago, with the Supreme Court decision in less than two weeks,” said Invesco’s Newman. “I would be a lot more nervous getting involved now unless it was priced attractively.”
While the borrower is yet to make an official announcement, BNP Paribas and Citigroup are thought to have been mandated on the deal after arranging meetings with investors over the past month. (Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Marc Carnegie)