Wednesday, March 13, 2013

Honduras pays a premium in debut international bond sale

By Paul Kilby
NEW YORK (IFR) - Honduras on Tuesday priced its first-ever bond offering, but talk of coups, widening fiscal deficits and two negative outlooks made the sale difficult and forced the sovereign to pay up.
Monday's last-minute disclosure of a legal ruling that could leave the impoverished Central American country exposed to a US$200m judgment meant it was forced to widen pricing and come at the lower end of its targeted size range of US$500m-US$750m.
Pricing came at par to yield 7.5%, or 547.9 basis points (bp) over Treasuries, wider than the initial 7% area talk heard last week before the issue was delayed due to what were described as documentation issues.
Some investors were taken aback by revelations Monday that US courts had named Honduras as the successor-in-interest - the legal term for an entity that assumes the responsibility of another - in a case dating back to 2003, involving state-owned agency Corporacion Forestal y Industrial de Olanco, or Corfino.
It is thought that Ministry of Finance was only notified about its involvement late last week, leaving leads with the responsibility for pushing back pricing and disclosing the details to the buyside.
Barclays subsequent withdrawal from the transaction only served to create greater doubts around the trade, as investors declined to participate and helped shrink the book size from a peak of around US$2.5bn.
Barclays said in a statement to the market that it was withdrawing from the Honduras deal "due to the recent developments relating to a required additional disclosure to the offering materials."
"I am a little surprised that officials were not aware of this lawsuit or didn't disclose it," said one of the investors looking at the offering Monday. "The plaintiff is aiming for just over US$200m, and that is not small by any means for an economy this size."
Despite such complaints, investors set aside concerns once the remaining lead Deutsche Bank tested the waters again at 7.5% after discussing the case with the buyside and the Finance Minister.
Arguments were made that a US$200m judgment would have little material impact on the economy and would only move debt to GDP from around 35% to low 36%.
Such discussions and the extra yield appeared to turn several on the buyside, though there were clearly investors who would not buy the credit at any price.
"There were a bunch of people who liked it at 6.5%, so a lot of people loved it 7.5%," said an analyst.
That extra 100bp made all the difference and encouraged some investors who had initially pulled their orders to a change of heart and a rush back into the trade. This in turn pushed up grey levels and secondary prices once the bond was free to trade. By the afternoon, the bonds were trading at 102.00-102.50.
"It looks like the supplemental disclosure was more incompetence on the part of the government rather than anything sinister," said another investor. "They ended up paying 0.75% for that mistake as the deal would've priced at 6.75% last week otherwise."
The deal was thought to have involved the smaller universe of investors involved in Central American trades and was driven by US demand, where about 75% of the paper was placed. The remainder mostly went to Europe.
The transaction was always seen as a challenging one in light of two negative outlooks from rating agencies.
Standard & Poor's revised its outlook to negative from stable in late February, a move followed by Moody's on Monday.
Moody's highlighted the country's fiscal and external challenges due to weak tax collection, limited fiscal flexibility, poor control over spending and rising debt levels. It also underlined the country's widening current account deficit, which is only partially financed by FDI.
"Last year, the nearly 10% of GDP current account deficit was partially covered by international reserves, resulting in a decline in the overall reserves level," the rating agency said.
On the other hand, Moody's cited stable GDP and FDI as strengths, as well as strong remittance inflows at 16% of GDP.
Government debt fell from 60% of GDP to 17% in the wake of an agreement from 2005-07 to forgive debt among bi-lateral and multilateral creditors, but that has since risen to 35% and is likely to climb further, the agency said.
Apart from the fiscal challenges, Moody's also said there is a moderate possibility of a coup, much like the one that took place in 2009 when then President Manuel Zelaya was deposed after he attempted to amend the constitution so that he could run for another term.

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