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Buenos Aires Fills Fernandez Bond Sale Vacuum: Argentina Credit

Argentina's President Cristina Fernandez de Kirchner
Argentina's President Cristina Fernandez de Kirchner, seen here, said Sept. 24 she isn’t interested in selling bonds abroad at an 8 percent yield. Photographer: Michele Tantussi/Bloomberg

Argentine municipal governments from Buenos Aires to Cordoba are filling the void created by President Cristina Fernandez de Kirchner’s decision to spurn international bond markets.

Buenos Aires sold $250 million of five-year bonds to yield 11.5 percent yesterday, the province’s second overseas sale in three weeks. The offering pushed issuance by local governments this year to $1.8 billion, according to data compiled by Bloomberg. Yields on federal bonds due in 2017 fell to 8 percent yesterday, the lowest since the government issued the securities as part of a $12.2 billion swap of defaulted debt in June.

Fernandez, 57, said Sept. 24 she isn’t interested in selling bonds abroad at an 8 percent yield. The lack of sales from the Argentine government, which has been absent from overseas bond markets since it defaulted on a record $95 billion in 2001, has paved the way for offerings by the provinces of Cordoba and Chubut and the city of Buenos Aires.

“The relative shortage of supply of Argentine sovereign paper has meant the provinces now have the opportunity to access the market,” said Jeremy Brewin, who manages $2.4 billion of emerging-market assets, including Argentine debt, with Aviva Investors in London. “I wouldn’t be surprised to see other provinces come.”

The yield on the government’s 2017 bonds has tumbled 499 basis points, or 4.99 percentage points, from a high of 12.99 percent on June 8, according to data compiled by Bloomberg. Emerging market yields overall declined 144 basis points over the same period, according to JPMorgan Chase & Co.

Foreign Reserves

Argentina’s ability to tap central bank reserves to repay debt allows it to refrain from selling bonds in international markets, according to ING Investment Management. The government has used $5 billion of the country’s $51.5 billion reserves this year to pay creditors and plans to use another $7.5 billion in 2011, Economy Minister Amado Boudou told lawmakers Sept. 16.

“They started talking about 10 percent as their target to come to the market and now they’re talking about 8 percent, but the fact is that they can remain absent from international markets for a long time,” said Gorky Urquieta, who oversees about $14 billion of emerging-market assets at ING Investment in Atlanta, including bonds from Buenos Aires province.

Buenos Aires province’s sale yesterday boosted the size of its 11.75 percent bonds due in 2015 to $800 million. It sold $550 million of the securities to yield 12 percent on Sept. 27.

Investor Meetings

Felisa Stangatti, the spokeswoman at the Buenos Aires province Economy Ministry, didn’t return a call seeking comment.

The city of Buenos Aires is also considering returning to international bond markets after selling $475 million of five-year bonds in March. Public Credit Director Abel Fernandez said on Oct. 8 that he and city Finance Minister Nestor Grindetti would meet in Washington this week with representatives of 10 investment banks to discuss a possible bond sale next year.

The capital 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.

The extra yield investors demand to own Argentina dollar bonds instead of U.S. Treasuries fell 19 basis points to 554 at 5:19 p.m. New York time, according to JPMorgan’s EMBI+ index.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose 21 basis points to 689, according to data compiled by CMA DataVision. 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.

‘Enough Money’

Warrants linked to growth in South America’s second-biggest economy fell 0.13 cent to 12.70 cents, according to data compiled by Bloomberg.

The peso was little changed at 3.9504 per U.S. dollar.

A debt sale by the Argentine government would fail to curb issuance from local governments, said Jim Harper, director of corporate research at BCP Securities in Greenwich Connecticut.

“There’s enough money out there to absorb it,” he said. “I don’t think if the sovereign came out with an issuance it would absorb all the liquidity and that would close the door. A lot of investors are giving Argentina a second look in this environment and starting to invest back.”

Regional governments are benefiting from growing investor confidence in the country, according to ING’s Urquieta. Standard & Poor’s raised the South American nation’s rating one level on Sept. 13 to B, matching a July increase by Fitch Ratings. The central bank forecast Argentina’s economy will grow 9.5 percent this year, the fastest expansion since 1992.

“As the perception that sovereign risk improved, the conditions were improved by extension for the provincial bonds,” Urquieta said.

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