While all Latin American eyes have been on Brazil and one impeachment after another, the election of another president, Mauricio Macri, in late 2015, has resulted in a much improved economic situation for Argentina.
Investors’ confidence has also improved and, last week, Argentina issued a 100-year bond, denominated in US dollars, with a coupon of 7.125% at a price of 90.00 – giving a yield of just under 8%.
As the managers of MI TwentyFour Dynamic Bond pointed out: “Argentina is not the first sovereign to issue 100-year bonds; Mexico, Ireland and Belgium have all locked in super-long funding, as has government-owned Petrobras. However, these issuers have all been investment grade rated (at least at the time of issuance), whereas Argentina is sub-investment grade.”
In a world where low developed market interest rates are driving income-starved investors to search further afield, 8% may look very attractive (by comparison both Mexico’s long bond yields are around 5.5%).
However, it is important to remember that the higher the yield, the higher the risk. The managers of Aberdeen Emerging Market Bond fund commented: “Argentina’s past record will leave some investors sceptical, with the country defaulting on a number of occasions since independence in 1816.” Even if the country does not default, a lot can happen between now and 28 June 2117 when the bonds mature.
Nicolas Jaquier, economist on the Standard Life Investments Emerging Markets Debt team, added: “Argentina issued perpetual bonds in international capital markets back in the 19th century! However the practice lost steam as several inflationary episodes eroded their value.
“I think the intention with this bond issue was twofold. One was to satisfy investors’ demand for Argentine assets – many investors are still bullish on the long-term outlook for the economy, despite the very gradual pace of adjustment so far. The other was the intention to send a strong signal to markets and direct investors. The government was keen to show that it is not a typical sub-investment grade sovereign credit and that it has confidence it will return to the investment grade category in the foreseeable future.”
It is doubtful any investor today intends to hold the bonds to maturity – unless they are investing for very young grandchildren! But as Aberdeen concluded: “It’s worth remembering that 100 years is more than a lifetime for almost all investors, but with a yield of around 8% investors could cover the initial outlay within 13 years.”