Peru defied market sentiment in November when it issued a S7.1bn (US$2.45bn) 10-year benchmark bond: the region’s largest-ever cross-border local currency issue, despite a year that saw declining interest in the asset class thanks to FX volatility and a strengthening US dollar.
In a first for a switch trade, the sovereign asked investors to release US dollar bonds for local currency debt, as it sought to mop up expensive off-the-run securities and issue a large sol-denominated benchmark to add a much-needed dose of liquidity to its local currency curve.
“This has become their largest bond in soles on their entire curve,” said Gabriel Bochi, managing director, debt capital markets at BBVA, which led the deal along with Bank of America Merrill Lynch and Morgan Stanley.
Marking the biggest domestic currency liability management operation recently seen in Latin America, the trade involved a S3.25bn new cash sale of global depositary notes as well as another Ps3.88bn in 5.7% 2024s produced through investors switching existing debt for the new offering. At a final yield of 5.75%, the new GDNs came cheap to a local sovereign curve that most bankers had at about 5.40% on an interpolated basis.
Yet higher financing costs were mitigated by the size of a trade that helped Peru continue to de-dollarise its external debt and add liquidity to a market that remains increasingly populated by international accounts.
“The government had done auctions every week over the last year, but it only sold US$20m at a time, so liquidity had dried up,” said Charles Moser, managing director at Morgan Stanley. “They needed to do something big to add liquidity and this is what we did.”
The switch trade served this purpose well and had been successfully deployed by other LatAm sovereigns seeking to retire expensive instruments and create one large liquid benchmark in one fell swoop.
The transaction brought an added layer of complexity to the operation given its preference for local currency bonds and the GDNs it used to target foreign accounts. The issue was done in combination with a cash tender targeting sol-denominated 9.91% 2015s and 7.84% 2020s, and US dollar-denominated 9.875% 2015s, 8.375% 2016s and 7.125% 2019s.
Investors had the choice of tendering their bonds for cash, switching their existing bonds for the new issue or buying the new securities for cash.
The sovereign, rated A3/BBB+/BBB+, received some reverse enquiry on longer-dated dollar paper, allowing it to also tap its 5.625% 2050 for another US$500m.
Despite demand for dollar paper, the sovereign decided to ringfence the 2050 tap and used that money for prefunding and not liability management.
“If we had offered a new 10-year dollar bond, these guys would probably have switched into the new 10-year bond, but we didn’t give them that option by design,” said Bochi.
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