May 24, 2016 / 3:41 PM / a year ago

Buenos Aires back in market after year's hiatus

NEW YORK, May 24 (IFR) - The City of Buenos Aires was poised to price an up to US$890m 11-year amortizing bond on Tuesday, its first deal in the capital markets in more than a year.

Taking advantage of recent spread tightening, Argentina’s capital city was approaching investors with initial price thoughts of high 7s on a bond with a 10-year average life.

In February 2015 it paid an 8.95% yield on a six-year amortizing 2021 that has since tightened to 6.5% following the government’s agreement with holdout investors, which reopened Argentina’s access to hard-currency funding.

Yet while the metropolis is seen as the country’s economic powerhouse, some think such levels may be overly ambitious amid a surge of supply from other provincial issuers at higher rates.

“The city always prices better than the rest of the provinces,” a syndicate manager away from the deal told IFR.

“The only drawback is that you have other provinces printing in the mid 8s.”

The provinces of Neuquen, Mendoza and Buenos Aires have all tapped the international market over the last few months, and more are expected. But not all have performed well.

Mendoza’s new 2024s are trading at a mid-market price of around 98.00 or a yield of 8.77% after pricing earlier this month at 98.71 to yield 8.625%.

The question on some bankers’ minds is whether accounts think the better credit quality of Buenos Aires is worth the tighter price on the new deal.

“The credit dynamics of the city are positive given its scale and lower levels of debt, but it will probably come at 7.5% and we don’t think there is a lot of value,” said Sean Newman, a senior portfolio manager at Invesco.

At a 6.5% yield, the existing 2021s are trading at a G spread of 535bp or some 65bp over the sovereign’s curve.

At 7.5%, this new deal would come at just 50bp over, Newman explained.

“We believe we can get more value by buying other provincial deals out there,” he said.

Other bankers away from the deal think the high 7s seems like a reasonable starting point, given where the 2021s are trading and their the high dollar price of around 108.00.

An up to US$390m tender for the existing 9.95% 2017s, which this deal is funding, should also create a natural underlying bid as holders switch into the new bond.

By late morning order books had reached around US$2.4bn, according to a source.

“Given that the city is offering a cash premium of US$1,055 for every US$1,000 to purchase the notes, plus accrued and unpaid interest, the offer introduces an incentive to compensate investors for their loss of future cash flows,” wrote S&P Global Ratings wrote last week.

Bank of America Merrill Lynch, Deutsche Bank and HSBC are acting as leads on the deal, which is rated B2/B-/B. (Reporting by Paul Kilby; Editing by Marc Carnegie)

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