Buenos Aires province is paying more to borrow in the bond market than Argentina’s capital city. And the municipality is making sure Argentines know it.
Nestor Grindetti, the financial chief for Buenos Aires city, sent a mock “congratulations” over Twitter on Sept. 27 to his counterpart in the province for locking in a 12 percent yield on five-year dollar bonds sold overseas that day. The rate compared with 10.5 percent on similar maturity debt issued by the city in March and about 9.4 percent on sovereign notes due in 2017. Average emerging-market dollar bond yields fell to a record low 5.4 percent in August.
“Congratulations to my neighbor and colleague, Alejandro Arlia,” Nestor Grindetti wrote on Sept 27. “The province placed $550 million in five-year bonds at 12 percent, 250 basis points above the sovereign!”
Three months after President Cristina Fernandez de Kirchner completed a restructuring of international debt, the discourse among politicians in Argentina is increasingly focused on when to issue debt and at what cost. Fernandez said Sept. 24 in New York that the government, aiming to return to international markets for the first time since its 2001 default, will wait until Argentine debt yields less than 8 percent, compared with an average 9.79 percent yesterday, according to JPMorgan Chase & Co. indexes.
Yields on Argentine provincial debt should continue to fall, tightening the gap with federal debt, said Christian Cavanagh, who oversees 800 million pesos ($202 million) in mutual funds at RJ Delta, a unit of Raymond James Financial Inc., in Buenos Aires.
“The depth of this market, the investor base, and the coverage is increasing,” said Cavanagh, who started a fund last week that invests in provincial and municipal debt.
Backed by property taxes and licensing fees, the city run by Mayor Mauricio Macri, an opposition leader, generates about 90 percent of its own revenue. The province, which surrounds the city and provides more than 30 percent of Argentina’s total gross domestic product, relies on the federal government for more than half of its revenue, said Patricio Esnaola, an analyst at Moody’s Investors Service in Buenos Aires.
Moody’s rates the city B1 and the province two levels lower at B3, six steps below investment grade and in line with the federal government. The city’s rating is the highest of eight regional and local Argentine governments rated by Moody’s, Esnaola said.
“Most investors view the province as some kind of slight derivative of sovereign risk,” said Jim Harper, director of corporate research at BCP Securities in Greenwich, Connecticut. “The city has much better numbers and different sources of revenue.”
Polls show Macri, the 51-year-old former president of the Boca Juniors soccer club, as a potential presidential candidate against Fernandez or her husband, ex-president Nestor Kirchner, in elections next year.
The discussion of comparable borrowing costs took a political twist two days later as Buenos Aires province’s Arlia, whose Twitter page is bordered by images of former Argentine President Juan Domingo Peron and his wife, Eva, responded to his city counterpart, saying: “The province returned to the markets with better conditions than the city, thanks to the leadership of President Cristina Fernandez de Kirchner. Thank you, Madame President!!!”
Buenos Aires province was the fourth local government to issue debt in international markets this year. Chubut province, the nation’s top oil producer, sold $150 million of notes backed by oil and gas royalties to yield 9.66 percent in July. Cordoba, Argentina’s third-largest province, sold international notes for the first time a month later to sell $400 million worth of seven-year dollar bonds to yield 12.375 percent.
The Twitter feud continued in the following days, with Arlia saying the province paid less in commissions to the banks managing its sale, Charlotte, North Carolina-based Bank of America Corp. and Frankfurt-based Deutsche Bank AG, and Grindetti advising his counterpart to not “spit into the wind” by criticizing the city’s bond sale.
“You know what? You don’t understand that 11.75 percent is less than 12.5 percent,” Arlia wrote on Sept. 29. “Here’s the final financial math class -- the coupon is 11.75 percent, the yield is 12 percent,” Arlia said. “Both of those are less than 12.5 percent.”
Laura Beheran and Hernan Stella, press officers for Arlia and Grindetti, confirmed the ministers’ Twitter accounts. Neither minister returned calls seeking comment.
Standard & Poor’s raised the country’s credit rating one level to “B,” five levels below investment grade, on Sept. 13, citing the economy’s “strong” performance. The move followed Argentina’s $12.2 billion restructuring of defaulted bonds in June, the second swap of debt since the 2001 default.
The extra yield investors demand to own Argentine dollar bonds instead of U.S. Treasuries fell 11 basis points, or 0.11 percentage point, to 664 at 10:16 a.m. New York time, according to JPMorgan.
The peso slid 0.1 percent to 3.9617 per dollar. The currency touched 3.9755 per dollar on Sept. 28, its weakest level since its inception in 1992. Warrants linked to growth in South America’s second-biggest economy rose 0.06 cent to 11.95 cents, according to data compiled by Bloomberg.
The cost of protecting Argentine bonds against default for five years using credit-default swaps rose 11 basis points yesterday to 749. The swaps dropped 200 points during September, the biggest decline among government debt worldwide. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
“Sometimes you don’t have the luxury of choosing when you want to raise money,” said Harper. “You have to raise money when the markets allow you to raise money.”
After a one-day lull, the insults started flying again today between Arlia and Grindetti.
“You are desperately trying to get a name for yourself in the province!” Arlia said, to which Grindetti replied: “You’ve lowered the level of the debate with your customary attacks.”
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