Colombia Girds for Bond Coupon Shock to Cut Refinancing Risk

  • In Business
  • 2022-11-28 21:42:31Z
  • By Bloomberg

(Bloomberg) -- Colombia is selling around $1.36 billion of bonds to repay existing US-dollar-denominated securities maturing in 2023 and 2024, even as it may cost twice the coupon of its previous similar-length bond offering.

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The Latin American nation plans to price the 10-year notes at an 8.125% yield after preliminary price discussions of around 8.5%, according to people with knowledge of the matter who asked not to be named. The country raised $2 billion through a sale of 2032 bonds in April 2021, which was priced to yield 3.356%.

The deal had garnered about $4.4 billion in demand by around 12:40 p.m. in New York on Monday, according to people with knowledge of the matter. Fitch Ratings and S&P Global Ratings cut Colombia to junk in 2021, though the nation still retains the second-lowest investment-grade rating at Moody's Investors Service.

"It's very good to see Colombia -- which is sort of a split rated sovereign -- back in the market," said Nicholas Hardingham, a London-based senior vice president and emerging-market debt portfolio manager at Franklin Templeton. The fact that proceeds of the transaction will be used to repay shorter term maturities, is "a sensible approach."

The deal would be the first in the US market since the election of President Gustavo Petro, a leftist politician who took office on Aug. 7. The Colombian peso has has weakened more than 20% since Petro was declared the winner after the runoff in June.

Borrowing costs for Latin American bond issuers in dollars, meanwhile, have improved in the last two months. The yield of Bloomberg Emerging Markets LatAm Statistics Index was 8.31% as of Friday, down from 9.4% on Sept. 20. The extra yield investors demand to hold high-yielding sovereign debt from emerging-market nations over US Treasuries has fallen to 8.48 percentage points points since peaking in late October, according to a JPMorgan & Chase Co. data.

"Timing is pretty good given the mini-rally we've had over the past few weeks," said Jorge Ordonez, a credit strategist at BBVA Securities. "Rhetoric has calmed itself somewhat and the market seems to be easing into accepting that this really still is a high double-B credit getting priced well below its rating."

For instance, Morocco which is also rated one step below investment grade by Fitch and S&P, has $1 billion of bonds due in December 2032 that are quoted to yield around 5.8%, according to Bloomberg prices.

Colombia is following Panama in selling new debt at more expensive terms than previous transactions to reduce its refinancing risk. The government managed to pass tax reform earlier this month that will raise around 1.3% of gross domestic product each year from 2023.

Even as financing terms in the emerging markets have been improving recently, not all countries will opt to take advantage. Paraguay, which is rated by at the same level as Colombia by Fitch, plans to stay away from global bond markets for the time being due to the increase in interest rates and instead seeks to finance its spending needs with loans from multilateral lenders early next year, Deputy Finance Minister Ivan Haas said.

HSBC Holdings Plc, Banco Santander and Bank of Nova Scotia are managing the deal, according to people familiar with the matter. Credit Public director Jose Roberto Acosta confirmed that the deal seeks to repay its outstanding global bonds due in 2023 and 2024.

In that regard, the nation said it's offering to buy back some of its 2.625% bonds due 2023 and 4% and 8.125% securities due 2024, the government said in a separate statement.

--With assistance from Maria Elena Vizcaino, Daniel Covello, Matthew Bristow and Ken Parks.

(Updates to show deal size, pricing level and add comment from Franklin Templeton.)

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