Bond Traders See Profits in Argentina’s $5-a-Month Utility Bills

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In the well-to-do Palermo neighborhood of Buenos Aires, the electricity bill for a three-bedroom apartment comes out to about 45 pesos a month, or roughly five dollars.

It’s been pretty much the same for 15 years, thanks to a freeze on utility prices that began after Argentina’s economic collapse in 2001. But that’s starting to change, which is proving to be a boon for utilities such as Edenor, the nation’s largest electricity distributor -- and their creditors.

The first sign came in March, when Argentina said it began helping electric utilities pay for the cost of subsidies in February. Edenor has posted losses in four out of the past five years as it has been unable to raise prices enough to keep up with soaring inflation. For Edenor bondholders, the news sparked the biggest gains among developing-nation utilities, driving down borrowing costs that reached 18 percent this year.

“For the very first time, the government is acknowledging a new and definitive rate must be approved,” said Daniela Cuan, an analyst at Moody’s Investors Service. “This is clearly positive.”

Cuan said she also expects more substantial changes to the industry’s pricing caps once Cristina Fernandez de Kirchner’s eight-year presidency ends Dec. 10.

New Terms

Edenor, which provides electricity to about 3 million residents in and around Buenos Aires, will receive about 3.55 billion pesos under the terms of the resolution this year, Chief Financial Officer Leandro Montero said on a conference call May 14.

That money will be used for capital investments while normal cash flow can be used to pay debt, he said.

The yield on the bonds has tumbled 1.78 percentage points to 13.88 percent since the decree was published, the lowest since February 2012.

Miguel Bein, an economic adviser to leading presidential candidate Daniel Scioli, says a measure earlier this year to subsidize bottled gas to only consumers who need it is a model on how to proceed with electricity.

Current rates are “equivalent to buying a large pizza,” Bein said at an event in Buenos Aires on May 13. “That’s a subsidy that comes directly from the central bank’s coffers.”

Price Controls

Transferring the burden to customers may be difficult after more than a decade of price controls.

Officials have announced changes to subsidies at least three times while ultimately keeping them unchanged. In 2012, when the government asked customers to give up the subsidy, few volunteered.

Any increase will help Edenor’s creditworthiness.

While bond yields have fallen, investors have shown concern in the past over a potential default or takeover from the government. After Fernandez seized YPF SA in 2012, Edenor’s borrowing costs jumped to 32.6 percent.

The $176 million of 2022 bonds outstanding and $14.7 million due in 2017 are the only foreign-currency debt Edenor has, meaning the relief will help make coming payments more manageable, Moody’s Cuan said.

“With this new resolution it’ll likely keep servicing its debt,” she said.

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