Pedestrians walk by the main entrance of the Buenos Aires Stock Exchange, Argentina, April 18, 2016.MARCOS BRINDICCI/Reuters
The world's most infamous borrower has returned to global debt markets in spectacular fashion after 15 years in exile.
On Tuesday, the government of Argentina sold $16.5-billion (U.S.) in sovereign bonds in what is the largest such offering to date by an emerging-market country.
Investors responded with enthusiasm to the country's first global debt issue since its default in 2001: Demand for the bonds was more than four times the supply, allowing Argentina to borrow a larger amount than it expected and at more favourable rates.
The bond sale is the culmination of a remarkable turnaround. Until recently, Argentina was a pariah in international credit markets. Twice this century it has defaulted on its debt. It spent years embroiled in an epic legal battle with a group of bondholders; U.S. hedge funds used every available means – including briefly seizing a navy vessel – to force the country to pay up.
Things changed rapidly starting in December when Mauricio Macri became president, vowing to reverse the policies of the preceding administration. By February, the government had struck a deal with the holdout hedge funds and began laying the groundwork for Tuesday's gigantic issuance.
"You've had a 180-degree change in policy intent from the Argentine government," said David Rolley, co-head of global fixed income at investment manager Loomis Sayles & Co. in Boston. "They've come in and said: 'Look, we're going to tell you exactly what's going on, we're not going to mess people around, and we're open for business.'"
But that's only half the story, Mr. Rolley added. At a time when interest rates on government debt are ultralow or even negative, Argentina offered investors a scarce commodity: bonds with a hefty yield. According to The Wall Street Journal, Argentina sold four tranches of bonds on Tuesday that will come due in 2019, 2021, 2026 and 2046. The tranches, respectively, offered yields of 6.25, 6.875, 7.5 and 8 per cent, the paper said.
The government will use some of the proceeds to repay its holdout creditors, which include Elliott Management Corp., a hedge fund founded by Paul Singer, a billionaire known for his aggressive and creative tactics in the world of distressed debt. Even by Mr. Singer's standards, however, the lengthy crusade against Argentina stands out.
Once the deal with Mr. Singer and other creditors was reached, the new Argentine government set out to court investors. It conducted a road show in the U.S. and Britain showcasing its economic team, which includes veterans of Wall Street and private equity firms: Finance Minister Alfonso Prat-Gay used to work at JPMorgan Chase & Co., as did the two people tasked with running the ministry's debt program.
The prospectus for the debt offering gingerly referred to the fact that "from time to time, the Republic carries out debt-restructuring transactions," according to Bloomberg News, which viewed a copy. That's a euphemistic way of describing the massive credit events in the country's past: Its 2001 sovereign-debt default was the largest on record until Greece defaulted in 2012.
It took complicated choreography for Argentina to arrive at Tuesday's sale. On April 13, a U.S. appeals court cleared the way for the country to access debt markets and make payments to its holdout creditors.
Two days later, Moody's Investors Service upgraded the country's credit rating to B3, six rungs below investment grade. Moody's cited the removal of legal obstacles in its decision, as well as "economic policy improvements" by Mr. Macri's administration.
Tuesday's sale shows that the government's sales pitch together with a robust yield were enough to make investors disregard Argentina's past. Initially, the country sought to sell less than $15-billion in bonds, but the demand was so high that it ended up borrowing $16.5-billion.
"There is still plenty of risk that this thing goes off the rails," said Mr. Rolley of Loomis Sayles. "You can also imagine a story that, without too many leaps, leads to improved prosperity and better growth for the whole country."