July 25, 2013 / 7:04 PM / 4 years ago

Uruguay preps for possible international bond

July 25 (IFR) - Uruguay has enough cash on hand to cover debt payments over the next year but could still come to the international bond markets for funding in 2013, according to the country’s head of public credit.

“We’re always looking at opportunities,” Azucena Arbeleche told IFR in an interview. “If you look at our history, we’re in the international markets at least once a year.”

Uruguay recently completed roadshows for investors in Peru, Colombia and Chile, and filed a shelf with the SEC to issue up to US$4.9 billion in new debt - both moves intended to keep the country ready if an issuance window opens.

And with another investment-grade rating in hand - its third, this time from Fitch, in March - Uruguay can now arguably consider a broader set of financing options.

That is a considerable development after the country spent years shrinking its exposure to dollar liabilities in order to shed its junk bond ratings.

According to Arbeleche, 59% of the sovereign’s debt is now denominated in local currency, putting it way ahead of its original 2014 target of 45%.

Furthermore, she said, rollover risks have been considerably diminished with average maturities of 11 years and just 3% of Uruguay’s debt maturing over the next 12 months.

Its recent investor meetings were prompted by interest from local accounts during the sovereign’s last foray into the international markets in November 2012, when it issued a total of US$854m in new 2045s as part of a cash tender and exchange to mop up shorter-dated and more expensive euro and dollar bonds.


Accessing the market may be a tougher proposition in the current environment, though.

Investors have been shying away from emerging markets (EM) debt on fears that the Federal Reserve will soon unwind the asset-buying program that has bolstered the asset class.

And Uruguay is likely to face questions about monetary and fiscal policies that strategists argue have sent the peso lower and imposed substantial losses on foreigners holding local currency debt.

In June, capital controls were imposed on non-residents, who own nearly half the outstanding local sovereign debt and are now required to deposit 50% of their investments with the central bank.

That move seemed ill-timed given the reversal of investor flows from the region, not to mention that the currency then weakened amid rising inflation concerns.

The policy of the central bank and the government is being questioned, and some analysts even wonder whether Uruguay will be able to keep its investment-grade rating long term.

But Arbeleche said that the controls do not apply to investors wishing to rollover existing bonds into new maturities.

“We are not seeing additional inflows because of the measures we adopted, but non-residents didn’t sell their securities,” she said.

And she insists that if further rates volatility closes off the markets to EM issuers, the country has some US$2 billion worth of contingency lines available with multilaterals - and that using them is already part of the sovereign’s strategy, and thus would not be seen as a credit negative.

Earlier in the year, Uruguay became the first sovereign to pre-pay IDB loans and participate in the bank’s new resource reallocation program, which allows governments to access contingent credit lines.

This made sense because the rates on the loans were above the sovereign’s cost of funding, and because a contingent credit line reduces a country’s cost of carry, as coupon payments are not required until it is drawn on.


Before the back-up in US rates and the subsequent turn in sentiment toward EM, Uruguay bonds - particularly the inflation-linked local currency instruments - benefited from the investor hunt for yield as well as the rarity value of its dollar bonds.

Although its longer dated 2045s have sold off - they were trading Thursday at a yield of 5.18%-5.11% - its dollar 2022s were around 3.92%-3.81%, showing the sovereign still enjoys attractive pricing prospects.

And bankers believe the country could be welcomed by investors if it is indeed ready to return to the funding markets.

“I think the window is open if Uruguay wants to do something,” one said.

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