Bankers got to make thier fees eh? Damn everyone else.
=DJ Panama's $1.06 Bln Bond Exchange Perplexes Investors
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By Matthew Cowley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Investors and analysts were left slightly perplexed by Panama's bond exchange last week, with some disappointed at the small size of the deal and others unsure why it was even done. The debt swap was far smaller than many had expected, given strong investor interest. And although it partly met the government's goal of lowering interest payments, it failed to retire smaller bond issues, which will now become even more illiquid.
The government exchanged $1.06 billion of existing bonds for $1.36 billion of new 30-year bonds, in a transaction managed by HSBC and JPMorgan. The new bond due in 2036 will be settled on Jan. 26 with a coupon of 6.7%, priced at 98.418 to yield 6.826%.
According to Panama's public credit department, the 6.7% coupon is the lowest on any of Panama's outstanding bonds - the second lowest being the 7.125% payable on $980 million of bonds issued in December. The government also improved the country's debt profile by reducing yields on longer-dated bonds.
Immediately after the offer was unveiled, Panama's longer-dated bond prices rose. Because prices move inversely to yields, Panama was able to flatten its so-called yield curve by lowering the yield on its longer-term bonds. This should make it cheaper for Panama when it brings more bonds to the market in the future.
The new 2036 bond and exchange structure is "consistent with the new Panama administration's ongoing effort to enhance the efficiency of its curve and achieve lower costs of funding moving forward," said Gerardo Mato, managing director and head of Latin America Global Investment Banking and Financing at HSBC Securities in New York, which coordinated the deal alongside JPMorgan.
Some analysts and investors were nonetheless slightly mystified by the market's reaction, given that there was no real premium being paid, and attributed it to the current overall enthusiasm toward emerging markets. There is also the perception that, with many countries having pre-financed 2006 requirements, there will be a shortage of new bonds coming to the market this year.
Investor participation was "fantastic," with holders of about 75% of $2.88 billion in eligible bonds offering to exchange them, said HSBC's Mato. Furthermore, about 90% of the bids were non-competitive, meaning investors would accept whatever premium Panama chose to pay.
"This was one of the highest, if not the highest, acceptance rates ever on an emerging market debt exchange," said Mato.
But Panama opted to buy back just some of the bonds from its outstanding 2020, 2023, and 2034 issues, and none from the 2027 and 2029 issues. Instead of getting rid of these smaller bond issues altogether, investors are now left holding small amounts of very illiquid bonds.
In a written response to questions, Panama's public credit director, Aracelly Mendez, said the issue was limited by a $1.4 billion shelf-registration in the U.S. that few investors were fully aware of, as well as by a desire not to increase the country's overall debt burden.
"The decision was taken as a function of the impact of an increase in debt, and the bonds selected (to be exchanged) were those that would allow greater liquidity on the Republic's debt curve," Mendez said, declining further comment.
From a ratings perspective, the debt exchange won't make much difference, said Theresa Paiz Fredel, lead analyst for Panama and Director of Latin American Sovereign Ratings at Fitch. Fitch rated Panama's new bond at BB+.
Panama's main weaknesses is its high level of government debt, and, while the trends are "improving," it is "still going to take some time to get debt levels down to where we might put on a positive outlook," said Paiz Fredel.
Nevertheless, Paiz Fredel said the debt operations that Panama has been undertaking are welcome, as they have lengthened the yield curve and reduced financing costs.
But some investors still wonder why Panama carried out the exchange at all. John Peta, who manages some $400 million of emerging market fixed income for Standish Mellon Asset Management, used the price rise following the announcement as an opportunity to sell his 2027 Panama bonds. He said he was "surprised" by the offer, and that, from his investor point of view, it "didn't make sense."
"There seemed to be a lot of transaction costs for not a lot of gain," he said.
He said the 2027 bonds were relatively liquid assets, and that had Panama offered to buy back shorter-dated maturities, it might have been more attractive.
Alternatively, rather than trying to buy back the bonds and replace them with a larger bond, the country could have just tapped existing bond issues and made them larger, said Peta.
Peta said he used a recent dip in the 2027s to buy back into Panama.
-By Matthew Cowley, Dow Jones Newswires; 201 938 5692; matthew.cowley@dowjones.com
(END) Dow Jones Newswires |
