February 23, 2016 / 10:02 PM / in 2 years

Peru prioritizes diversification in euro trade

NEW YORK, Feb 23 (IFR) - Peru tapped new pockets of demand through a 1bn 14-year bond on Tuesday which, though expensive, established a presence for the sovereign in a market it had visited just four months earlier.

The Andean nation’s Euro deal on Tuesday was part of a strategy to diversify its investor base and not merely focused on getting the best possible price, said bankers.

“Peru sees it as an investment,” said a banker on the trade. “They could have issued in dollars and swapped back to euros but they wouldn’t have got their investor diversification.”

Costs versus dollars were seen as high, however.

Peru’s final spread of mid-swaps plus 295bp - the equivalent of about dollar Libor plus 387.5bp - was over 100bp wide to the 250bp fair value spread on a new 14-year dollar bond, said a syndicate manager away from the trade.

“No matter how you look at it, it is pretty wide to the dollar curve,” he said.

That may have mattered little to Peru, which like other sovereigns is less sensitive to such comparisons given they often keep proceeds in the original currency.

Still new issue concessions for some were closer to 30bp after using tighter pre-announcement levels on existing euro denominated 2026s of 225bp-230bp for the A3/BBB+/BBB+ rated sovereign.

The leads preferred to look at levels of 250bp-255bp following global investor calls on Monday. Taking the 35bp differential between Mexico’s 10- to 14-year euro bonds, leads put fair value on Peru’s deal at anywhere between 285bp-290bp, or a new issue concession of 5-10bp after pricing the deal at a spread of 295bp over mid-swaps.

The sovereign priced the deal at 99.753 to yield 3.773% or mid-swaps plus 295bp, the tight end of guidance of 295bp-300bp and inside initial price thoughts of 300bp area.

That looked attractive against the similarly rated Mexico, which had outstanding 2029s and 2031s trading around 225bp and 250bp respectively.

It also provided a nice pick up to European peers like Poland, which is rated A2/BBB+/A- and had 2027s and 2036s being spotted at I spreads of 105bp and 146bp, respectively.

Final spreads were also tighter to Romania, which carries a lower Baa3/BBB-/BBB- ratings and had 2025s and 2035s being quoted at I spreads of 200bp and 285bp.

STILL A GOOD DEAL

For Peru, the 14-year tenor fell nicely into its maturity profile, and it was able to lock in an eye catching coupon of just 3.75%.

“They did pay up to do it, but on the flip side a sub 4% coupon is attractive,” said the syndicate manager.

Peru’s bonds were now in the hands of more investors too.

In contrast to October’s 10-year euro bond, which was placed largely with asset managers, Tuesday’s 14-year bond was sold to a different group of buy-and-hold investors, including insurance companies, sovereign wealth funds and central banks.

“It is an additional layer of investor diversification,” said a banker on the deal. “The 10-year saw a broad set of asset managers, banks and some insurance companies. This deal was driven by insurance companies, particularly out of Germany.”

European insurance companies have been struggling to hit yield targets in a market where even peripheral credits like Spain are trading with 14-year yields of just 2.1%.

Against that backdrop an investment-grade sovereign like Peru has its appeal despite its exposure to commodity volatility.

Nomura analysts are forecasting that Peru should enjoy 3.6% and 4.2% GDP growth this year and next, making it a “pioneer in undertaking a moderate cyclical rebound following the collapse in commodity prices.”

The predominance of buy-and-hold accounts resulted in fewer padded orders and a relatively small book of just 1.5bn, leads argued.

Under other circumstances, this would have resulted in a smaller trade, but thanks to firm appetite Peru was able to raise a hefty 1bn while also tightening pricing. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)

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