Chavez Ally’s Once-in-Century Debt Exposes Neglect: Andes Credit
Bolivia’s first international bond sale in almost a century is turning into a cautionary tale for fixed-income investors trying to bolster returns with the riskiest emerging-market debt.
The nation’s dollar notes due in 2022 have returned 1.3 percent since being issued in October, less than half the 4 percent gain for junk-rated sovereign debt in developing nations. Among countries rated BB- by Standard & Poor’s, yields on Bolivia’s notes have fallen 0.11 percentage point, versus a decline of 1.12 percentage points on Serbian bonds and a 0.5 percentage-point drop for Ukrainian debt.
Two months after persuading investors to lend South America’s poorest nation a half-billion dollars for 10 years at 4.875 percent, Bolivian President Evo Morales seized local units of Spain’s Iberdrola SA (IBE), at least the 15th takeover since he assumed power in 2006. While the nationalization risk was outlined in the prospectus, investors facing record low rates in the U.S. and Europe demanded more than eight times the amount offered. Mexico, Latin America’s second-largest economy, paid twice the rate for a 30-year global bond in 1996.
“It’s surprising that a country with such political risk as Bolivia has, which is the big weakness for our credit rating, can place bonds in international markets below 5 percent,” Cesar Arias, an analyst at Fitch Ratings, said by telephone from New York. “Low international interest rates are resulting in low yields for highly speculative-grade countries.”
Fitch rates the Bolivian government notes BB-, or three levels below investment grade.
Bolivia’s Finance Ministry didn’t respond to telephone or e-mail messages seeking comment on the country’s bonds.
Investors who bought the Bolivian notes were paid 3.06 percentage points more than comparable U.S. Treasuries, according to data compiled by Bloomberg. Similar-rated El Salvador paid a premium of 4.2 percentage points over Treasuries when it issued $800 million of bonds due in 2025 in December.
Morales, an ally of Venezuelan President Hugo Chavez and a former union leader who has moved to put the telecommunications, energy and water industries under state control, ordered army and police to seize four of Iberdrola’s units on Dec. 29 in a bid to create what he called “egalitarian electricity rates in rural and urban areas.”
In June, the government nationalized the Colquiri tin and zinc mine owned by Glencore International Plc. (GLEN)
“The pattern of nationalizations since 2006 could have a material adverse effect on investor confidence in Bolivia and investments in Bolivia and our ability to make payments on our outstanding public debt, including the Notes,” the Bolivian government said in its bond prospectus.
Bolivia should be trading more in line with “less market- friendly countries” such as Venezuela, Argentina and Ecuador, according to Joe Kogan, head of emerging-market debt strategy at Scotia Capital Markets.
At 4.76 percent yesterday, Bolivia’s debt yielded at least 3.4 percentage points less than similar-maturity bonds from those three countries, data compiled by Bloomberg show.
“When you nationalize, you are discriminating against foreign investors,” he said by telephone from New York. “When you start discriminating in one area, sometimes it spills into other areas,” he said. “I was surprised at how low Bolivia issued.”
Bank of America Corp. and Goldman Sachs Group Inc. arranged Bolivia’s bond sale. Kerrie McHugh, a Bank of America spokeswoman in New York, declined to comment the bond’s performance. Goldman Sachs spokesman Michael DuVally didn’t respond to a request for comment.
Sarah Glendon, an analyst at Moody’s Investors Service, says Bolivia’s “sound” public finances and high prices for natural gas, the country’s biggest export, bolster its ability to service its bonds.
The Finance Ministry forecasts Bolivia’s economy will grow 5.5 percent this year after an estimated 5 percent expansion in 2012. That exceeds the average 3.6 percent projected growth for Latin America, data compiled by Bloomberg show. Bolivia’s gross domestic product was $23.95 billion as of 2011, according to the most recent data from the World Bank.
Bolivia had a budget surplus of about 1.5 percent of GDP in 2012, according to the Finance Ministry. Brazil, Mexico and Argentina all had deficits of at least 2.4 percent of their economies, data compiled by Bloomberg show.
“It’s a new issuer so there’s probably a little bit less known about Bolivia,” Glendon said in a telephone interview from New York. “If you do pay attention to Bolivia and you do look at their public finances, you see a country whose public finances have been sound for the past several years.”
Yields on Bolivia’s bonds were little changed at 4.77 percent today.
While bondholders should have understood the political hazards of buying Bolivian debt given the country’s track record, the search for bigger returns is letting countries like Bolivia issue at lower levels, Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc., said in a telephone interview from New York.
“There’s just so much liquidity that you’re not being adequately compensated for the risk,” Morden said. “You have to get a return on your investment.”