Colombia enjoyed an improving reputation all year on the international bond markets as its economy pulled ahead and the political milieu looked less explosive. In spite of its many grave problems, the government of President Andrés Pastrana has succeeded in forging ahead with fiscal reforms, stabilizing the public finances and returning the country to growth. As a reward, the World Bank agreed after a year of negotiation to help Colombia cut its cost of funds in the market by providing a partial, rolling guarantee for up to $1 billion worth of bonds. The bond was intended to raise enough money to cover up to 85% of the sovereign’s financing needs in 2001.
In recognition of the bond’s structure, its status as a new Colombian benchmark and the determination of the issuer to press ahead in a difficult market, LatinFinance has selected the Colombian 10-year, $750 million bond as best dollar sovereign bond of the year. Krishna Challa, lead specialist for Colombia at the World Bank, says this is a “rather special instrument so we want to use it in the most fitting cases and Colombia was a particularly fitting case. We are giving a kind of stamp of good housekeeping with these kinds of bonds.”
It is an improved version of a similar bond that Argentina issued in 1999 at a time when it was a star reformer and a favorite among investors. But market conditions were particularly rough when Colombia launched its bond, forcing the government to scale back its ambitions. It had to cut the bond’s size by a quarter and pay more than it hoped. The bond nevertheless sold well and performed strongly in 2001, a particularly difficult year for Latin America. The bond was issued at 99.847 and closed the year at 104.98.
On March 26, in the middle of the roadshow to market the Colombian bond, Standard&Poor’s downgraded Argentina to B+ from BB. This made Colombia, fighting a drug-financed guerrilla insurgency, a more difficult story to sell than usual. Another challenge for the Colombian finance team and its bankers, Goldman Sachs and JP Morgan, was an S&P downgrade of the 1999 zero-coupon Argentine World Bank-guaranteed bond. When this bond lost its investment-grade rating, many high-grade investors had to sell these illiquid bonds into a hostile market.
The World Bank’s guarantee only covers two payments at once, but as long as Colombia services is bond on time, the guarantee automatically renews and rolls over at each payment date to the next unguaranteed payment. The bond has a mortgage-style repayment structure consisting of 20 equal semi-annual payments to match the World Bank’s fixed-size guarantee.
When the deal was launched, Juan Mario Laserna, Colombia’s director of public credit, had to choose between trying to sell a $1 billion bond, scaling it back or aborting the deal altogether. He decided to settle for $750 million and accept a spread of 500 basis points over Treasurys, more than he expected the sovereign would have to pay.
The bond closed on April 2 to a generally favorable reception. The World Bank’s partial guarantee won the bond a BBB investment-grade rating from Standard&Poor’s, three notches above the BB-rated sovereign. The bond pays a 9.75% coupon to yield 9.786%. JP Morgan and Goldman Sachs were joint lead managers and placed 80% of the offering with high-grade investors, three-quarters of them in the US and the remainder in Europe. Colombia only used $119 million of the $220 million World Bank guarantee, enabling it to reopen the bond in May to raise a further $250 million.
Unlike the similarly backed Argentine bond, Goldman and JP Morgan had aimed to make the Colombian one as liquid as possible. Cheikah Kane, one of the JP Morgan bankers who worked on the deal, says the bond was one of “the biggest dollar Colombian bonds, with 23% of the Colombian EMBI.” In contrast, the Argentine bond was “very, very illiquid and so it could not pass any test for EMBI inclusion.” Laserna commented after the issuance that he was right to proceed. “It worked to have a strong transaction of $750 million that was oversubscribed instead of a weak $1 billion one,” he said. He says the issue proved that Colombia “can raise money in a very difficult market where no [sovereign] had issued since February. We came out with a benchmark issue.”
For other sovereign issuers, especially sub-investment grade borrowers, the dollar market grew tougher as the year wore on. Argentina’s woes weighed heavily on the market. Investors were also concerned about Brazil’s deteriorating debt dynamics and disruptions in electricity supplies that slowed the economy abruptly. Most of 2001’s sovereign dollar issuance was concentrated in the first part of the year, when there was substantial appetite for Latin risk, especially Mexico, which borrowed $4 billion. Argentina issued no dollar bonds in 2001, a year in which Latin American sovereigns sold $12.33 billion-worth of bonds into the dollar market, up from $11.55 billion in 2000.