Peru missteps as borrowers face up to crunch

27/03/2009 | Sid Verma

Peru has come under fire for going ahead with a costly sovereign bond deal at a time when, some commentators argue, there was no need to do so.

Peru has come under fire for going ahead with a costly sovereign bond deal at a time when, some commentators argue, there was no need to do so.
Peru issued a $1 billion ten-year bond on Wednesday. The deal, rated BBB– and Ba1, was priced to yield an 7.169% interest rate, 4.375% above US treasuries.
Renewed enthusiasm for emerging market risk, on the back of US treasury secretary Tim Geithner’s latest plan to save US banks, announced on Monday, helped place a cap on new issue premiums at around 50 basis points (bp), say bankers.
Nevertheless, the Peruvian deal was still too costly, and other borrowing options should have been considered, Pablo Secada, the former debt director at the country’s finance ministry, told Emerging Markets.
“Peru does not really need to issue new debt”, Secada, who resigned at the end of November, said. The deal should have been priced at around 400 bp above US Treasuries to yield a lower interest rate, given the scarcity value of Peruvian external bonds, he argued.
Peru’s last foray into cross-border markets was in July 2007, when it priced a $1.5 billion sol-denominated bond to yield 6.90%, a competitive price given the exchange rate risks.
Debt traders said this week that real money investors sold Peru’s existing 2016 and 2037 bonds to free up cash to buy the new benchmark. As a result, wider secondary market prices will increase the cost of future Peruvian debt issuance.
Pescado also said the creation of a new ten-year benchmark was unlikely strategically to boost liquidity in the country’s yield curve, and is not needed to address short-term budgetary pressures.
Instead, the bond was launched to pre-finance funding needs in 2010, while the fiscal deficit next year is projected at healthy 0.4% of GDP. Carol Sandy, Latin America economist at Credit Suisse, said: “I was surprised about the timing of this deal.”
Analysts have warned that Latin governments are paying through the nose for new sovereign bond deals, and may be unwisely repricing existing yield curves upward. Regional borrowers continue to go to the markets while shunning crisis cash from the IMF.
Brazil, Colombia, Mexico, Peru and Panama have taken advantage of the thaw in global credit markets since January to price new deals at high spreads in tandem with the global repricing of assets.
Fee-hungry sell-side market players argue that issuers are rightly seizing the opportunity now the primary market window is open for high-rated sovereigns.
“There are some with the view that market conditions may not be any better at the end of the year, so some issuers are looking to be ahead of the curve,” said Russell Ashcraft, emerging debt syndicate banker at RBS in New York.

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