For two consecutive years, Uruguay has looked beyond the dollar, yen and euro markets to nearby Chile for financing. Uruguay issued the first Latin American cross-currency bond in 2000, with a six-and-a-half year, 82 billion Chilean peso-denominated bond that was equivalent to $142.5 million. And last year, the sovereign again tapped the Chilean peso market, this time with a 10-year CHP88.2 billion ($150 million) bond.
Uruguay’s innovative use of a cross-currency bond allowed it to offer a competitively priced security to dedicated investors. It also allowed Chile to strengthen its position in the international capital markets as Chilean peso-denominated debt becomes more attractive to international investors and issuers. LatinFinance has named the Uruguayan bond the local currency sovereign issue of 2001.
Chilean peso-denominated bonds first became an attractive alternative for international issuers when the World Bank floated a Chilean peso-denominated bond in May 2000 with a five-year, CHP55 billion ($104.5 million) 6.6% offering. Uruguay then issued its first Chilean peso bond in November, which had a 7% coupon. The sovereign’s subsequent March 2001 peso-denominated bond, with a 6.375% coupon, gave investment-grade rated Uruguay access to funding without triggering an oversupply in local, dollar and euro markets, which would have adversely affected bond pricing. Gabriel Bochi, vice president JP Morgan explains, “Uruguay has traditionally raised funding in the dollar, yen, euro and local markets. But by issuing in Chilean pesos, it could avoid overcrowding these markets and get pricing equal to or better than dollar pricing.”
JP Morgan, which led the issue, (its predecessor, Chase Manhattan had pioneered the cross-currency issue technique) sold the bonds mainly to Chilean pension funds looking for ways to diversify their investments. Under Chilean law, pension funds can invest no more than 20% of their holdings in foreign securities. Bochi says that since Chilean fund managers must restrict their investments to high-grade, low-risk securities, they are often starved for yield.
“Chilean pension funds are limited to investment-grade risk,” he says. “This offering allows them to diversify their holdings because it is with a foreign issuer and the pricing is more attractive than what local issuers can offer,” says Bochi. “It was also cheaper for Uruguay to issue the Chilean-peso bond rather than issuing in other currencies, satisfying both sides of the deal.” In November, Uruguay issued a 7.63% 10-year $300 million global offering that priced at 97.73 and in June it launched a 7% 10-year ¤200 million bond, priced at 99.09. But Uruguay’s Chilean peso issue outdid both the dollar and euro issues when it priced at par and performed inside its US dollar yield curve.
Carlos Oliveres, manager of foreign fixed income trading for Cuprum, a Chilean pension fund, says the spread on the Uruguay bond convinced his company to invest $50 million. Cuprum bought the security at 150 basis points over Chilean Treasury paper. “This issue offered a very attractive deal and was a good opportunity for us,” he says. “In the international market there are very few issues in Chilean paper and we like to have a more liquid local market and more opportunity to trade Chilean-peso paper.”
Jorge Valencia, vice president for JP Morgan, says that there was a significant number of debt buybacks by Chilean issuers last year, further reducing the supply of bonds in the market and leaving investors hungry for a fresh offering. “Chile has developed very good relationships with international markets, but there is not a huge amount of paper out there,” says Valencia. He says the Uruguayan bond allows investors to buy Chilean risk through the currency and not through the country’s credit. “[International] investors have shifted their portfolios to more secure issues and Chile is the frontrunner for this,” says Valencia. By issuing in pesos, Uruguay diversified its investor base with attractive pricing.
Although both Chilean investors and Uruguay benefited from tight pricing not available in their respective local markets, Chile’s first foreign corporate issuer did not fare as well. In August, Hilton Hotels Corp., became the first US company to issue bonds in Chilean pesos. But its CHP65.5 billion ($100 million), 7.43% eight-year peso bond, private placement led by Credit Suisse First Boston had limited success. One investment banker says that over-aggressive pricing hurt the bond’s acceptance. “I think the bond being undersold has to do with the appetite that pension funds have for this type of issue,” he says. “The Hilton bond was trading too close to what the fund managers could get in Chile’s local market and they would rather stick to Chilean issues they know well.”
Cuprum invested $20 million in the Hilton issue when it was launched in August, but the events of September 11 have driven down the price of the bond. “The Uruguay issue was a better deal for us because the Hilton bond’s spread is much wider post- September 11,” says Oliveres.