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Chile Gets $1 Billion 10-Year Dollar Bonds at Cheapest Funding Rate Ever

Chile, Latin America’s highest-rated borrower, sold $1 billion of dollar bonds at a record-low yield after the biggest rally since December 2008 in benchmark U.S. debt.

The government sold dollar bonds due in 2021 to yield 3.353 percent, according to data compiled by Bloomberg. Chile also increased its existing 5.5 percent peso-denominated bonds due in 2020, selling an additional $350 million to yield 4.4 percent. Deutsche Bank AG and HSBC Holdings Plc managed both sales.

Finance Minister Felipe Larrain tapped the international bond market for the first time in more than a year after the yield on 10-year dollar bonds fell 74 basis points from the 3.89 percent paid when they were sold in July last year. That was the least Chile had paid to borrow since it first sold bonds as an independent republic in 1822, Larrain said at the time.

“Chile has very good numbers across the board,” said Gunter Heiland, who helps manage $2.2 billion of emerging-market assets at Greenwich, Connecticut-based investment fund Gramercy and bought the new Chilean dollar bonds yesterday. “It’s a good diversification that was reasonably priced.”

The Andean nation’s economy is growing at its fastest pace in more than a decade at a time when much of the world is struggling with a widening European debt crisis and slower global growth.

The $200 billion copper-based economy will decelerate in the third and fourth quarters after growing 8.4 percent in the first half of 2011, the fastest pace since 1995, Larrain said at the Bloomberg Chile Economic Summit on Aug. 24. The economy may grow by more than 5 percent next year, he said.

Copper Savings

Chile has increased fiscal savings to $18 billion, the highest level since 2009 and about 9 percent of GDP. Copper prices, which plunged 6.6 percent last month after more than tripling in value since 2009, are underpinned by “robust” demand, Thomas Keller, the chief financial officer of Chile’s state-owned copper company Codelco, said at the Bloomberg conference. Copper accounted for more than half of Chile’s exports last month, the central bank said today.

Moody’s Investors Service rates Chile’s dollar bonds Aa3, the fourth-highest investment-grade rating. Standard & Poor’s and Fitch Ratings rank them one level lower at A+.

“Chile is one of the better emerging market sovereigns out there,” said Cathy Hepworth, who helps manage about $15 billion of emerging-market debt for Prudential Financial Inc. in Newark, New Jersey. “In this environment, to the extent that people have cash, it’s attractive.”

Spread Widens

The bond sale establishes benchmarks that will facilitate borrowing for Chilean companies, Larrain said from New York yesterday, according to a ministerial statement sent by e-mail.

Chile’s 2020 dollar bonds yielded 3.15 percent as of 6:45 p.m. New York time yesterday, according to data compiled by Bloomberg. That’s a 131 basis point spread over similar maturity U.S. Treasuries, up from 80 basis points on July 7.

The extra yield, or spread, investors demand for Chile’s 10-year dollar bonds instead of U.S. Treasuries widened 55 basis points in the last two months.

“They’re taking advantage of the low yield curve rather than tight spreads,” said Donato Guarino, an analyst at Barclays Capital in New York. “Even though the spread has moved wider, U.S. yields are so low that this is cheap for them.”

The outstanding peso-denominated bonds yielded 4.34 percent as of 8:02 p.m. New York time yesterday, compared with 4.31 percent on Sept. 6, according to data compiled by Bloomberg.

“There’s a scarcity of bonds in the market,” said Siobhan Morden, head of Latin America strategy at RBS Securities Inc. in Stamford, Connecticut. “There’s a shift into global foreign exchange bonds at the moment because of the higher yields they offer and the low beta on foreign exchange.”

A low-beta currency is one that’s relatively insulated from fluctuations in market volatility.

The government plans to hold most of the proceeds from the sale overseas, removing any effect on the local exchange rate. Part of the money can be used to repay maturing debt while some will be deposited into an offshore savings fund, the finance ministry wrote in an e-mailed statement.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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