Bond Darwinism Buoys Default-Tested Corporates: Argentina Credit
Argentine company bonds, buffered by the third-highest yields in the world and reduced debt burdens, are defying a global selloff to post the best returns in emerging markets.
Dollar bonds from Argentine companies including Pan American Energy LLC and Aeropuertos Argentina 2000 SA gained 6.8 percent this year, including reinvested interest, as corporate notes globally lost 1.3 percent, according to data compiled by JPMorgan Chase & Co. and Bank of America Corp. Argentina’s government securities, ensnared by a legal dispute over defaulted debt, have lost 12 percent in 2013, the third worst decline among 56 developing nations tracked by JPMorgan.
Speculation the Federal Reserve may soon curb unprecedented stimulus has sparked a surge in Treasury yields that’s wracked the world’s safest corporate debt, while concern that liquidity will decline is prompting record outflows from emerging market bond funds. Argentine companies, whose bonds pay 11.23 percent, have net debt that’s an average 1.9 times earnings, according to Fitch Ratings. That’s in line with U.S. companies ranked BBB+, or eight levels higher than Argentina’s B- cap for most corporate ratings.
“Our view is that since Argentina’s been really cut off from international markets, anything that say Ben Bernanke says has less of an effect on Argentine corporates,” Mariela Anguiano, an analyst at BCP Securities LLC, said in a telephone interview from Greenwich, Connecticut. “Many of these companies have very strong fundamentals, but are essentially just in a bad neighborhood.”
Yields on 10-year U.S. Treasuries have surged 0.91 percentage point, or 91 basis points, to 2.72 percent in the past two months. The extra yield investors demand to own Argentine company bonds instead of the benchmarks slipped 13 basis points in the period to 960 basis points on July 3, according to JPMorgan index data. Markets were closed yesterday in the U.S. for a holiday.
Outflows from emerging markets are quickening, with investors withdrawing a record $5.7 billion from bond funds in the week through June 26 after Bernanke said he could cut back stimulus as the U.S. labor market improves, EPFR Global data compiled by Morgan Stanley show.
BCP recommends clients buy dollar bonds due 2021 from Pan American Energy, the country’s largest oil exporter. The securities, which yield 8.43 percent, have returned 16.7 percent this year, according to data compiled by Bloomberg.
Pan American is operated by 40 percent-owner Bridas Corp., a joint venture between the billionaire Bulgheroni brothers and state-owned Chinese producer Cnooc Ltd. BP Plc owns the other 60 percent, and allows the Argentine brothers to manage the company.
Pan American’s ratio of net debt to earnings before interest, taxes, depreciation and amortization fell to 1.1 times in the first quarter from 1.5 in 2012. Profit surged in the three months through March by 31 percent to 607.5 million pesos ($113 million) after the oil producer secured higher export prices from the government.
Guillermo Baistrocchi, a press official for Pan American Energy, didn’t immediately respond to e-mails and telephone calls seeking comment on the company’s bond performance.
BCP also recommends Aeropuertos Argentina 2000’s $270 million of 10.75 percent amortizing notes due 2020. The securities, which have returned 14.4 percent this year to date, pay 13.19 percent, more than double the average for emerging-market corporate debt. The company has contracts to operate 33 of Argentina’s 54 airports for the next 15 years.
Carolina Barros, a press official for Corp. America SA, the holding company for Aeropuertos Argentina, declined to comment.
The world’s third-highest inflation, tightening currency controls and the threat of further nationalizations after the takeover of YPF SA in 2012 have prevented Argentine companies from accessing international debt capital markets for over a year. Heavy regulatory and tax burdens along with a poor investment climate add significant sovereign risk to even companies that are fundamentally sound, according to Greg Saichin, who helps oversee about $212 billion as head of emerging market and high yield portfolio management at Pioneer Investments in London.
“For companies servicing coupons, amortizations and debt repayment, there is always constant risk of falling into technical default due to the inability to source and transfer dollar payments,” Saichin wrote in an e-mailed response to questions. Sovereign risk “constitutes the dominant risk here.”
The extra yield investors demand to own Argentine government debt over Treasuries narrowed 26 basis points to 1,178 basis points at 2:03 p.m. in Buenos Aires, according to JPMorgan’s EMBI Global index.
The cost of insuring Argentine debt against non-payment for five years with credit-default swaps fell 34 basis points to 2,910 basis points yesterday, according to prices compiled by CMA Ltd. That level implies an 88 percent probability of default.
Argentine firms have largely been successful building capital structures to defend against the policy mix of current President Cristina Fernandez de Kirchner, according to Joe Bormann, a managing director at Fitch in Chicago.
“There is a degree of Darwinism in terms of survival of the fittest in Argentina,” Bormann said in a telephone interview. “There are some extremely strong companies. They’re trying to position themselves as best they can to weather the storm.”