El Salvador 2023 bond payment in peril as IMF relationship sours -Moody's

NEW YORK, Jan 27 (Reuters) - The lower probability of a deal with the International Monetary Fund increases liquidity risks for El Salvador as it eyes an $800 million bond maturity next year, credit rating agency Moody’s said on Thursday.

“Policy differences related to the government’s embrace of bitcoin have lowered the probability that an IMF deal will be reached in time to address the government’s upcoming January 2023 $800 million bond maturity,” Moody’s analysts wrote.

“The lack of IMF funding would significantly increase the risk for an adverse credit outcome.”

The bond closed Thursday at 78 cents on the dollar, pricing in a 65% probability of default according to Tellimer Research, which has a ‘hold’ rating on El Salvador bonds.

The IMF on Tuesday urged here the government of the Central American country to strip bitcoin's legal tender status, a request Salvadoran president Nayib Bukele later mocked on Twitter here.

Bukele plans to create the world's first "Bitcoin City" and plans to finance it issuing so-called bitcoin bonds here.

The expected $1 billion bond issuance is awaiting a legal framework here that the government earlier this month said would be sent to congress.

The 10-year bond is planned to yield 6.5% and later provide exposure to gains in the value of bitcoin. El Salvador’s outstanding 2032 bond is currently yielding 17%.

The bitcoin issue is seen as El Salvador’s trump card to counter its narrowing access to markets. If the issue is successful, Moody’s estimates the debt-to-GDP ratio will rise to 90% by 2023.

“We also believe that the government will not be able to rely on additional multilateral development bank (MDB) support, having exhausted support from the Central American Bank for Economic Integration and other regional MDBs,” Moody’s said.

The success of the bitcoin issue could also be a partial relief for El Salvador’s debt burden, according to Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities.

“The effective liquidity management over the next few months and successful launch of a (bitcoin) bond may allow for a pull to par on the 2023s and perhaps even residual positive impact on the curve on the demonstrated ‘willingness to pay’,” she wrote.

But the distressed levels in the longer term bonds require a “medium-term plan that either lowers liquidity and/or solvency risks,” she said. (Reporting by Rodrigo Campos; Editing by Lincoln Feast.)