Argentina’s 69% Utility Rate Boost Isn’t Enough for Bond Traders

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In a country where utility prices have been largely frozen since 2002, you’d think bond investors would welcome the biggest-ever jump in rates.

Not so in Argentina, which has been plagued by rampant inflation. The dollar-denominated bonds of Argentina’s largest gas pipeline operator, Transportadora de Gas del Sur, have gained just 0.16 cent since a June 8 decree allowed the company to lift transportation fees by 44 percent. Transportadora de Gas del Norte, the second-largest, has seen its bonds fall since winning a 69 percent increase.

“With this hike, we can only ensure that we’ll have enough funds to pay our creditors this year,” Jose Montaldo, institutional and regulatory affairs manager at Transportadora de Gas del Norte, or TGN, said in a phone interview. “To meet our obligations next year, we’ll need a new increase.”

With accumulated inflation estimated by consultancy firm Orlando Ferreres & Asociados at 1,145 percent since 2002, the most recent decree, on top of a 20 percent increase last year, means companies still need rates to rise 15 percent a year to operate, according to Raymond James Argentina.

To protect consumers from paying more while also keeping companies afloat, the government has subsidized distributors, producers and transporters of natural gas and electricity.

Utility Returns

Speculation of a more market-friendly government taking office in December after elections has pushed utility companies higher in the bond and stock market on bets they’ll get meaningful rate increases and return to profitability.

Argentine corporate debt has returned 6.8 percent this year, almost double the 3.7 percent average in developing nations. Electricity distributors Edenor and Transener have been the best performers, with 31 percent and 23 percent gains respectively, according to the Bloomberg USD Emerging Market Corporate Bond Index.

Argentina’s peso was little changed Tuesday to 9.0437 per dollar as of 1:24 p.m. in New York.

With Daniel Scioli of President Cristina Fernandez de Kirchner’s Victory Front alliance leading opinion polls and promising gradual reforms, a quick fix for utility companies isn’t a given.

“We’re assuming that similar announcements will be made in the future, although at lower rates,” said Santiago Wesenack, who covers TGS for Raymond James. “The resolutions seem tailor-made to keep both companies afloat.”

‘Isn’t Enough’

Most of the money will be used to repay debt that pipeline companies have with gas producers, according to Wesenack.

Even if the benefits are short-lived, creditors will be pleased to have payments guaranteed this year, according to Moody’s analyst Daniela Cuan. With natural gas prices having tumbled 38 percent in the past year, pipeline companies are also facing losses on their unregulated sales, Cuan said.

“For TGS, which is poised to lose huge amounts in its unregulated business after the gas-price slumps, this government measure is key,” said “It’s indeed a credit positive.”

While the new tariff will bring an additional 180 million pesos ($19.9 million) this year, the company will again lose money after reporting a 256 million peso deficit in 2014, according to TGN’s Montaldo.

“To put it clearly, this isn’t enough,” Montaldo said.

(To be sent this Argentina Credit column, click SALT ARCREDIT. For more debt-related news, see TOP CM.)
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