Fernandez Bond Yields Fall Below Higher-Rated City Debt: Argentina Credit

Argentine government bonds are yielding less than notes issued by higher-rated Buenos Aires, a sign that investors expect Moody’s Investors Service to give the country its first upgrade in five years.

The federal government’s 7 percent dollar securities due in 2015 rose faster than bonds sold by its capital city since Sept. 10, driving the yield gap to a record 118 basis points as of 12:51 p.m., according to data compiled by Bloomberg. Government yields were as much as 235 basis points higher than the city’s as recently as May 6 and fell below Buenos Aires about a month ago.

Argentina, whose B3 rating from Moody’s is six levels down from investment grade and one step below Buenos Aires, is regaining investor confidence after President Cristina Fernandez de Kirchner restructured $12.2 billion of defaulted debt and the central bank forecast the fastest economic expansion since 1992. Standard & Poor’s raised the South American nation’s rating one level on Sept. 13 to B, matching a July increase by Fitch Ratings and in line with Belize and Lebanon.

“Moody’s rating for Argentina is lagging behind,” said Ivan Aftalion, a trader in Buenos Aires with Standard Bank Argentina, a unit of Africa’s largest lender. “The market has already called for an upgrade and all that’s missing is for the raters to catch up.”

Argentine bonds yield an average of 574 basis points, or 5.74 percentage points, more than U.S. Treasuries, compared with a yield spread of 708 for bonds sold by Belize, according to JPMorgan Chase & Co. indexes. Moody’s also rates Belize B3.

Moody’s hasn’t changed Argentina’s rating since 2005, when the country reached an initial restructuring settlement following its record default on $95 billion of bonds in 2001.

‘Market Opinions’

Concern about the accuracy of government statistics, including inflation and gross domestic product, is an obstacle to the country achieving a higher rating, said Gabriel Torres, an analyst at Moody’s in New York.

“We are aware of market opinions, but we never base our ratings on them,” Torres said. “The economy and the public finances have clearly improved in the last few years and we don’t deny that, but the institutional concerns are still weighed heavily in our view.”

Consumers expect prices to rise 25 percent over the next year, more than double the official rate and the most in the world after Venezuela, according to a Sept. 15 survey by Buenos Aires-based Torcuato Di Tella University.

Economists and politicians including Vice President Julio Cobos and former Economy Minister Roberto Lavagna began to question official statistics in early 2007, when Nestor Kirchner, Fernandez’s husband and predecessor, made personnel changes at the national statistics institute. Kirchner and Fernandez say government data is accurate.

Yield Spread

Five-year credit-default swaps tied to Argentine debt fell 16 basis points to 694 yesterday. 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.

Warrants linked to economic growth rose 0.26 cent to 12.75 cents, according to data compiled by Bloomberg. The central bank estimates growth in South America’s second-largest economy after Brazil will accelerate to 9.5 percent this year.

The yield gap between the government’s bonds and securities sold by the city will narrow to about 40 basis points, according to Bulltick Capital Markets, a Miami-based brokerage that focuses on Latin America.

Buenos Aires’ “fiscal situation is in pretty good shape,” said Alberto Bernal, head of fixed-income research at Bulltick.

New Sale

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. Buenos Aires’ rating is the highest of eight regional and local Argentine governments rated by Moody’s.

Buenos Aires’ Public Credit Director Abel Fernandez said on Oct. 8 he and city Finance Minister Nestor Grindetti are meeting in Washington this week with representatives of 10 investment banks to discuss a possible bond sale next year. The city is looking to sell bonds that mature in seven to 10 years to help pay $350 million in debt and cover $150 million in infrastructure projects, including an extension of the subway system, Fernandez said.

Buenos Aires city sold $475 million of five-year bonds in March to yield 12.5 percent, according to data compiled by Bloomberg.

Buenos Aires province also plans to sell $200 million of bonds as soon as today in a re-opening of 11.75 percent notes due in 2015, said a person familiar with the transaction who declined to be identified because terms aren’t set.

‘Take Reserves’

Argentina, which hasn’t sold bonds overseas since the 2001 default, will use $7.5 billion of foreign reserves to pay outstanding debt next year, Economy Minister Amado Boudou said Sept. 16. President Fernandez said Sept. 24 that she isn’t “interested” in selling bonds until yields fall below 8 percent.

“The country can take reserves from the central bank to make payments while the provinces can’t,” said the city’s public credit department head Fernandez said in an Oct. 8 phone interview.

The yield on Argentine government bonds fell below that of city debt the day S&P raised the country’s rating, according to data compiled by Bloomberg.

“The upgrade gave the sovereign an extra punch,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal in New York.

To contact the reporters on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net; Drew Benson in Buenos Aires at abenson9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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