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A new bond will be launched in dollars to recover importance in global portfolios
El Cronista
December 29, 2009

Economy Ministry wants Argentina to recover some participation in the index that records great investors in emerging markets. Today the country represents only 1.38% in the EMBI.

LEANDRO GABIN Buenos Aires

One bit of good news that the debt swap will bring, beyond the possibility that the country would lose the label of defaulter, is that it would bring a new bond that would quote on the market. The brand new bond would be emitted under foreign legislation and would be denominated in dollars, a move that would point toward recovering some lost ground in global portfolios. The Economy Ministry plans this to begin repositioning Argentine debt, lifting it out of marginal participation, among the leaders that follow the markets.

While the Discount bond will be delivered to replace owed principal on debt, the new bond would be destined to collect as much on past interest as well as "new money", which is to say the cash payment for the US$1 billion that will be made by the government's creditors. And as it will be under foreign legislation and will quote in dollars, it will become part of the Emerging Markets Bond Index (EMBI) which is put together by JP Morgan, which today only includes the Par and Discount in dollars under New York jurisdiction. This species of "longer Boden 12 with foreign legislation", as it is called in official corridors, will allow Argentine debt to have more business attention, as the rise in the country's volume of emissions will automatically mean more investors buying Argentine debt. This is due to the simple reason that foreign managers of portfolios, who read the index, have to rebalance their portfolios on the basis of the new EMBI reports.

"It's a good idea because after the swap there will be a greater supply of local bonds and if the demand doesn't follow, the investors could go out and sell at the average curve. Thus, with a new emission, it's assured that the post-operation effect will be totally positive for the fixed-rate market," said a trader at one of the banks advising the government in the transaction.

What they are imagining at the Palacio de Hacienda is that this bond will feed the trading of Argentine debt, allowing even the compression of the spreads. Also, it will have a direct effect from being an emission under foreign legislation: as much only for a question of jurisdiction, this class of bonds has a spread of 150 to 200 basis points less than those emitted under local law. "It would be easier to place debt on the secondary market. Because if now they yield 10%, automatically they will pass to legislation yielding 8% or 9%," added those at the money desk of an international bank.

Currently, the Global EMBI by JPMorgan is composed of emissions from 39 emerging countries. The Argentine case is practically insignificant. It takes up 1.38% of the portfolio, which is equal to an emission of US$3.9 billion (adding together the Par and Discount bonds). Brazil and Mexico hold 12.85% and 12.65% respectively, while Russia has almost 11%. Argentina is less noticed than countries like El Salvador, Bulgaria or Pakistan.

According to market calculations, if the country manages an acceptance of 75% in the swap, the new emission in dollars would equal around US$3.2 billion. Thus, Argentina's participation in the EMBI would come to 1.86% and will add something like US$12.4 billion in total bonds. If in the operation they allow the creditors with debt in euros (which are the large part) to swap them for others in dollars, the aforementioned percentage would be "the floor" that the country would hold in the indicator.

In the last round, the real money (like foreign pension funds) was the most active in buying Argentine debt. This class of investors, apart from the traditional hedge funds (speculators), place their money in long term instruments.

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