Chile made debt capital market history on Thursday,
achieving the lowest ever yield for a Latin American sovereign,
with a blowout $1.52bn bond, split between dollars and
Late on Thursday, the sovereign
tapped the international bond markets for the first time in six
years, launching $1bn of 10 year global bonds to yield 3.89%, a
spread of just 90bp above US Treasuries. The dollar tranche was
followed by a $520m equivalent deal in 10 year peso denominated
bonds to yield 5.5%.
Investors flocked to the
long-awaited capital-raising even with the
record-breaking tight pricing buoyed by the scarcity
value of Chiles sovereign debt, the countrys clean
debt profile and its strong credit rating.
In June, Moodys upgraded
the sovereign to Aa3 from A1, the highest in Latin America.
Fitch rates the country as A and Standard & Poors A+.
US high grade accounts snapped up the dollar bond and both
tranches received $10bn of orders in total.
After embarking on a US roadshow
early in the week, rumours were rife that the deal would be
priced with a sub-4% handle. Anchored by an estimated $7bn
order book for the dollar tranche, leads Citigroup, HSBC and
JPMorgan secured aggressive pricing for the SEC-registered
The 90bp spread over US
Treasuries and 3.9% yield took the shine off Brazils
$825m retap on Tuesday, the lowest ever yield for a Brazilian
sovereign bond. That deal triggered market cheers with a
record-breaking 4.547% yield, a 150bp over US Treasuries.
"Brazils deal was great
but Chiles new benchmark has the wow factor," said a
banker away from the deal. The sovereign has not needed to tap
the global bond markets for the past six years as the finance
ministry had been buoyed by revenues from its copper exports.
Proceeds from the bonds will be used for reconstruction after
the countrys devastating earthquake in February.
With no bonds issued since 2004,
Chiles outstanding yield curve is illiquid, so roadshow
feedback, CDS levels and high grade European sovereign bonds
informed the pricing guidance, said one investor.
A lack of consensus over
Chiles theoretical yield curve makes calculations over
new issue premiums highly speculative. Nevertheless, the 2020
dollar bond should be seen in the context of state-owned copper
producer Codelcos 2019s that were trading at 3.95%
mid-week, said a banker away from the deal.
On this basis, the sovereign
priced its 2020s 6bp tighter, in line with the market
The illiquidity of Chiles
yield curve also set off the surge in orders for the primary
market deal, as it provided investors with a opportunity to
gain exposure to a liquid sovereign benchmark.
But the reaction was mixed. "US
high grade buyers were attracted to this deal because it
offered a pick-up to low-yielding US Treasuries but
emerging market investors were unenthused at the spread," said
one emerging market investor that snubbed the deal.
Chiles globally issued
SEC-registered bonds are indexed to the local currency
as Brazil and Colombia have also done quashing fears
that the product was no longer viable, as volatile emerging
market currencies are traditionally a risky play.
A banker away from the deal said
that fair value for the peso paper stands at 5.82%, when
comparing the equivalent 10 year Chilean peso government bond
in the local market with the peso/dollar currency swap market.
On this basis, the 5.5% yield for the global peso deal was
cheap for the issuer, said another banker.
This week, finance minister
Felipe Larrain said Chiles capital raising heralds the
sovereigns intent to become a more active international
issuer, in both dollars and pesos. The governments
estimated $8.4bn post-earthquake financing needs could be
easily financed by the countrys $40bn war chest of
international reserves and fiscal savings.
But the new centre-right
administration has chosen to rely on a combination of taxation,
new debt issuance, as well as savings.
US investors bought some 54% of the dollar tranche,
Europe 29%, Asia 10% and the Middle East and Latin America 7%.
For the peso tranche, 56% of investors were in the US, 33%
Europe, 9% Latin America and 2% elsewhere.