Argentina set to succeed in $15bn return to markets

Argentina’s plan to borrow $15 billion in a blockbuster return to world financial markets is set to win over international investors despite the nation’s history of defaults, analysts say.

A pariah on global markets since it declared a $100 billion foreign debt default in 2001, Argentina’s new market-friendly government eased its return by striking a $4.65 billion deal this week to pay off its four main hold-out creditors.

Argentina says it wants to raise some $15 billion in a bond issue — a 20-year record for an emerging market — in part to finance the deals struck with its remaining creditors. It would be the largest bond issue by an emerging market since Mexico raised $16 billion in 1996, according to research group Dealogic.

On Wednesday, a US judge agreed, under certain conditions, to lift an injunction that had effectively excluded Argentina from international finance.

Despite a credit rating wallowing in “default” territory and a history of eight defaults on its foreign debt since independence in 1816, investors will likely line up to lend to Latin America’s third-largest economy by snapping up its bonds, market analysts say.

Investors expect the tentative deal reached between Argentina and its biggest hold-out creditors to be carried through, said Carlos Caicedo, London-based IHS senior principal analyst for Latin America.

“There is going to be appetite for these bonds,” he told AFP, citing the country’s low foreign debt burden and the pro-business government of President Mauricio Macri, who took office in December.

With global interest rates at historic lows, investors are seeking out investments with higher returns, the analyst added.

“They are searching for yield, political risk is going down, but also there is some level of security because you are lending to a country that has very low levels of foreign debt,” Caicedo said.

– ‘A lot of hope’ –

New York court-appointed mediator Daniel Pollack said Monday that the agreement in principle struck by Argentina would see Buenos Aires “settle all claims” with the $4.65 billion cash payment to NML Capital, Aurelius Capital Management and two other hedge fund creditors holding long-defaulted bonds.

“It is clearly a good deal for Argentina so it is welcomed by investors,” said Christopher Dembik, a Paris-based economist at Saxo Bank.

“It is true that the ‘vulture funds’ come out of this well, but the key thing for the country is to settle this episode: In the long term, the country is buying economic security.”

Alexandra Wentzinger, economist specialising in Latin America at French bank BNP Paris, said that despite remaining uncertainties the agreement would allow Argentina to close a difficult chapter.

The country is expected to issue US dollar-denominated bonds with collective action clauses. In the case of a default, such clauses would allow a qualified majority of bondholders to agree a debt restructuring deal that is imposed on all of the bondholders.

Argentina will likely have to offer a high return so as to compensate foreign investors for the risks they would face, analysts said.

But many in the markets have been wooed by Macri’s planned pro-market reforms.

“There is quite a lot of hope for the new president but he will have to keep his promises,” said Guillaume Tresca, economist at investment bank Credit Agricole CIB in Paris.

“Argentina may profit from the fact that the other Latin American countries are not doing very well, notably Brazil, Venezuela, Chile and Columbia, which are really affected by the drop in commodity prices,” Tresca said.

Many Latin American economies also are suffering from the US Federal Reserve’s decision to start lifting interest rates from near-zero levels, which has tempted away foreign investment while at the same time raising the cost of servicing  dollar-denominated debt.

“Investors are keen to return to emerging countries, lured by attractive valuations. But they are still cautious because of the risks linked to the political situations, commodities and the Fed,” Tresca said.