Companies in Argentina are jumping at the chance to refinance their debt at rock-bottom rates as investors brace for more financial volatility before key primary elections next month.
In recent weeks, the deals have been seemingly endless: from state-run oil company YPF SA to Telecom Argentina SA to the country’s largest clean energy generators.
The pile of issuance shows just how much investors are demanding something — anything — to protect their savings from an all-but certain currency devaluation as the government runs out of dollar reserves to defend the peso. Companies are taking advantage of the rush, selling bonds that carry close to 0% interest and pay investors at the spot exchange rate at maturity.
Argentina’s capital controls restrict investors and companies from accessing dollars and issuing dollar-linked debt in pesos is one way Argentine corporates can find cheap financing. This is especially important as the cost of selling debt abroad remains elevated after the Federal Reserve’s rate hiking campaign to tame inflation, according to Francisco Schumacher, a corporate analyst at BancTrust & Co.
“The difference in US dollar domestic funding versus international funding is at a level I have never seen before,” Schumacher said. “Argentine companies are in a situation where international financing costs are very high and the risk of currency depreciation is palpable, but there’s a relatively low cost for domestic funding.”
Compania General de Combustibles SA is the latest company jumping on the liability management bandwagon. CGC sold $200 million in securities last week to local units of The Dow Chemical Co., which will be used to cancel existing debt. The notes, which don’t carry interest, improved the company’s liquidity and reduced its average cost of capital to just over 2.5% annually, according to S&P Global Ratings.
Companies like CGC are taking advantage of the demand as Argentines brace for volatility ahead of the vote, the outcome of which is still uncertain as inflation surges past 115% and the nation renegotiates its $44 billion program with the International Monetary Fund. The government owes the IMF about $2.6 billion by the end of July or risks running into arrears.
A surprise upset in the last primary elections in 2019 sparked a dramatic asset sell-off and an ensuing credit crunch that locked companies out of foreign and domestic markets.
“The local market is offering very low rates for companies which have been largely kicked out of the official exchange market,” CGC’s chief executive Hugo Eurnekian said in an interview. “This is where the opportunity lies, even if the local market has its own limitations.”
Devaluation Angst
Corporate issuance came to a head in March, with companies selling around 130 billion pesos ($325 million) in dollar-linked bonds, the biggest wave of issuance in more than two years, according to the latest available data from Argentina’s securities regulator. About $1.4 billion in corporate debt has been sold in Argentina this year through May, according to the data. In early 2021 Argentine corporates — like YPF — saw a series of restructurings when the central bank mandated that corporates refinance their debt in order to access dollars.
This June, state-run oil company YPF SA sold $150 million of local bonds, while Telecom Argentina issued almost $92 million in dollar-linked bonds at a 2.75% interest rate. More recently, green energy producer Genneia SA sold $71 million in dollar-denominated and dollar-linked bonds to fund capital expenditure, and power generator AES Argentina Generacion sold around $30 million in dollar bonds to repay existing debt.
Investors are scooping up these dollar-linked bonds in a bet the government will be forced to devalue the beleaguered peso around August’s primaries. Economists are also expecting Argentina will depreciate its official exchange rate, forecasting the peso will weaken to 400 pesos per dollar by the end of the year. This time, companies won’t be caught on the back foot, said Paula La Greca, a corporate analyst at TPCG Valores in Buenos Aires.
“Companies are taking advantage of this boom in the local market,” La Greca said. “They’re selling debt with coupons close to 0%, and if they have any pesos leftover, they’re going and buying back their more expensive debt.”
--With assistance from Jonathan Gilbert.
(Updates with January through May issuance data for Argentina corporates in tenth paragraph)
