Argentina gets boost from IMF deal changes; MENA firmer; Papua New Guinea guides pricing

By Rebecca Melvin

New York, Sept. 27 – Buyers stepped in to scoop up Argentina’s bonds on Thursday on the heels of news that it has renegotiated its International Monetary Fund bailout to increase funds, increase the amount of near-dated disbursements and adjust certain fiscal and monetary policy behaviors, market sources said.

The Argentina-IMF news came late in the day on Wednesday. On Thursday Argentina’s bonds were up 1 point to 1.5 point, a New York-based trader said.

“A feature of today is the details of the program made available late in the day yesterday,” said Seaport Global emerging markets fixed-income strategist Michael Roche. Argentina’s sovereign bonds made a stronger finish yesterday on news of the deal, after dropping and recovering somewhat on Tuesday’s news of the replacement of Argentina’s central bank head.

Otherwise there were small price changes in smaller credits on Thursday, Roche said. Mexico and Brazil were little changed on the day. Russia and Turkey were both weaker and down 0.6% each on the day. While Asian credits were also little changed including the Philippines and China.

Middle East and Africa region debt was much firmer on Thursday after a combination of news that JPMorgan’s emerging market sovereign bond indexes are adding Gulf Cooperation Council states next year and that Bahrain is potentially getting an aid package from its close allies to help it meet financing needs.

Becoming eligible for the EMBI Global Diversified, EMBI Global and EURO-EMBIG indexes are sovereign and quasi-sovereign debt issuers from Saudi Arabia, Qatar, the United Arab Emirates, Bahrain and Kuwait.

The GCC debt will be phased in between Jan. 31 and Sept. 30, 2019, with both conventional bonds and sukuk, or Islamic bonds, to be included. Although sukuk debt will need to have a credit rating from at least one of the three major rating agencies.

The MENA credits were “all very firm post the JPM index news and Bahrain headlines about a five-year aid package. So all are doing well,” a London-based trader said.

In addition to the JPM news, Bahrain’s Arab Gulf neighbors were weighing a plan for a five-year aid package to help cover Bahrain’s funding gap and protect a currency peg considered vital for regional stability. The amount being considered is $10 billion.

The package is intended to help Bahrain as it carries out fiscal reforms.

Also in primary action, Bahrain’s Gulf International Bank BSC joined the new issue calendar after it announced that it has selected banks and scheduled a roadshow in regard to a planned offering of U.S. dollar denominated five-year notes.

GIB Capital will act as global coordinator, and Citigroup, First Abu Dhabi Bank, GIB Capital, HSBC, JPMorgan, and Mizuho are among bookrunners.

The fixed-income investor meetings will be held in London on Oct. 1.

Gulf International was last in the international bond market for $500 million of 3 ½% notes due 2022 that priced in January 2017.

Elsewhere, Papua New Guinea was guiding pricing on a 10-year note for $500 million to yield 8 3/8%. Final pricing was expected later Thursday.

The 10-year senior unsecured notes (expected rating: B2/B), announced Sept. 4, were heard in the gray market ahead of pricing at 100.375 to 100.5.

Proceeds will be used primarily to refinance existing short-term domestic debt and finance government spending on infrastructure and development projects and operational expenses for the Asia-Pacific Economic Cooperation Summit to be hosted by Papua New Guinea in November.

Citigroup and Credit Suisse are bookrunners for the Rule 144A and Regulation S notes, which had been expected to have a tenor of five to 10 years.

‘Semblance of stability’

The U.S. Federal Reserve’s move to raise its target interest rate by 25 basis points from 2% to 2.25% as expected on Wednesday influenced market moves only to the extent that now the event is out of the way, Roche said.

“Their policy path has been fairly well incorporated into emerging-markets debt prices, and has fallen away as a primary determinant of recent direction,” he said.

The catalysts now are individual emerging markets credits and positioning within those credits, in contrast to before when it has been movement of capital out of emerging markets debt.

There was no surprise from the Fed, and capital has returned. Individual countries such as Argentina, South Africa, Brazil and Turkey had reached levels that saw value-seeking capital return to them in part, although not in full. But the important point, Roche said, is that valuation on the sovereign bond index at around 370 bps, referring to the current spread on the JPMorgan emerging markets bond global index, points to a “semblance of stability. Short term stability has returned and the bout of capital withdrawal has ended.”

There are two camps among the countries that are in the emerging-markets bond index. About 20% of the total market is made up of countries experiencing stress and financial difficulties, and spreads for those credits have widened 200 bps to 300 bps. While the other 80% of the index is made up of countries not experiencing that degree of difficulties, and although they have widened out, the moves are limited to 30 bps to 40 bps.

This represents a cleaving or a schism inside the index and as the selloff has abated, investors continue to look at those opportunities in the markets that have sold off the most, Roche said.

Also there will be sharp reactions to policy makers that are correcting economic matters and to such things as interest rates going up that have not been well broadcast.

Meanwhile, the new issue market has been open only to stronger credits for the most part. Those credits that have a strong investor support and strong balance sheets are those that are able to price new issues at this time such as those entities from the GCC.

Selective credits in recent weeks have been able to come to the market. Papua New Guinea was in the market with a 10-year issue on Thursday, sporting a yield under 9%, compared to 10% over for the some comparables such as Pakistan, Mongolia or other single B-rated Asian names.

“It looks like it is attractively priced and the order books stood at about $3.8 billion at the time of final guidance,” Roche said.

But the pace of new issuance for Latin America has been scant and is running well below the pace of issuance last year. Asia is at about 90% of last year’s run rate. But the Central & Emerging Europe, Middle East and Africa, or CEEMEA, is running ahead of last year’s pace, largely due to the large number of GCC issuers that have come to market.

“Thanks to the Middle Eastern credits, CEEMEA’s pace is new issuance is ahead of last year,” Roche said.

Buyers step into Argentina

Argentina’s 7 1/8% bonds due 2117, or its century bond, was up to 79½ bid, 80½ offered.

Argentina’s 2026 bonds were quoted at 91¼ bid, 92 offered.

“It’s about Argentina today,” Seaport’s Roche said. “There is active purchasing by investors.”

In terms of spread, Argentina was lower by 19 bps to 595 bps over Treasuries.

The details of the IMF package are a catalyst pushing Argentina up, with the policy conditions for the sovereign’s monetary authorities probably having a bigger impact than the larger deal size of $57 billion from $50 billion.

Under the package revisions, there will be front loading of funds, with $15 billion currently in hand and $35 billion to be dispersed by the end of 2019. So first, it provides comfort of Argentina’s ability to repay over this timeframe, Roche said.

Second, there are policy conditions for the monetary authorities that are a radical departure from current practice. They will be targeting growth rate of money supply of Argentina, which will limit or negate the practice of monetizing fiscal deficits, which has been the practice in the country for quite some time, Roche said.

The conditions increase the potential for Argentina to bring down inflation and introduce discipline in fiscal policy behavior, Roche added.

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