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 Geithners 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 countrys 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.
Perus 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
Debt traders said this week that real money investors sold
Perus 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 countrys
yield curve, and is not needed to address short-term budgetary
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
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
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
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.