Peru in focus as possible impeachment looms; Colombia benchmark improves after downgrade

By Rebecca Melvin

New York, Dec. 19 – The spread on Peru’s 2027 bonds was little changed on Tuesday at about 60 basis points over U.S. Treasuries as market players eyed the possibility of President Pedro Pablo Kuczynski being impeached this week after documents surfaced showing he had business ties with Brazilian industrial group Odebrecht SA more than a decade ago while he was a government official.

“It looks like the president of Peru isn’t going to stick around,” a New York-based market source said.

Kuczynski, who has been in office only 16 months, has denied that he had any links to Odebrecht. But the opposition party in Peru is calling for the vote and has a solid majority in congress.

Peru’s 2027 bond is among the most liquid of a generally illiquid sovereign dollar curve. The current spread level is toward the lower end of its recent range, including a swing down to 56 bps over Treasuries at the end of November and subsequent rebound to up about 70 bps, the market source said.

This political turn of events was viewed as negative for Peru, which has been on pretty solid footing economically, the source said.

The congressional committee investigating corruption allegations against Odebrecht said it received documents from the company last week showing that it paid $780,000 from 2004 to 2007 to Westfield Capital Ltd., a boutique advisory firm owned by Kuczynski. The period in question was when Kuczynski was finance minister and prime minister in the administration of Alejandro Toledo.

Colombia’s 3 7/8% notes due 2027 remained higher on Tuesday a week after ratings agency S&P Global Ratings lowered Colombia’s long-term foreign currency sovereign credit rating by a notch to BBB-, citing the South American country’s weakened policy flexibility.

The Colombia 2027 notes, which are probably the most liquid of the sovereign curve, were seen at 102 bid, 102¼ offered, representing a ¾ point improvement over the last week since the downgrade news, a New York-based market source said.

The spread on the Colombia 2027s was tighter by 15 bps since the announcement. “This is a non-event,” the market source said.

While market activity was thin given the holiday season and upcoming year-end, the downgrade did not really affect secondary trading levels, the source said. A bigger market influence will be the effect of elections, the source said, referring to Colombia’s upcoming presidential election in May.

Colombia’s economy continues to suffer from the effects of lower commodity prices, reflected in its high level of external debt, the ratings agency said.

“Amid weakened fiscal and external profiles generating diminished policy flexibility, we are lowering our long-term foreign and local currency sovereign credit ratings on Colombia to BBB- and BBB from BBB and BBB+, respectively,” S&P said in a news release.

The sovereign priced a $1.4 billion add-on of the 3 7/8% global bonds at 100.456 to yield 3.816% in August, boosting the issue size to $2.4 billion from the original deal, which priced in January at 98.596 to yield 4.042%, or Treasuries plus 160 bps.

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