Chile Bond Sale May Tempt Government to Break Issuance Plan Announced Just Three Weeks Ago

Chile Bond Sale May Tempt Government to Break Issuance Plan Announced Just Three Weeks Ago

Chile’s dollar bond sale last week was so successful it may tempt the Finance Ministry back into the market later this year, exceeding its plan for hard-currency issuance released just three weeks ago.

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(Bloomberg) — Chile’s dollar bond sale last week was so successful it may tempt the Finance Ministry back into the market later this year, exceeding its plan for hard-currency issuance released just three weeks ago. 

The South American nation priced $1.7 billion of notes due in 5 years at a spread of 85 basis points over similar US Treasuries, tightening from initial price talks of 120 basis points and below Chile’s existing yield curve. The sale represented the entire dollar issuance targeted for the year.

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“Although it is not part of the plan, given the positive result, the Treasury could reconsider issuing some additional bonds in foreign currency this year,” said Samuel Carrasco, a senior economist at Credicorp Capital. 

The spread on the 5-year notes was similar to that on 2029 bonds from Saudi Arabia, which is rated two notches above Chile at Fitch Ratings and one notch at Moody’s Investors Service. Moreover, demand for the new notes exceeded the amount on offer by 7.5 times. And all that in the context of a selloff in global markets in the first few weeks of this year.

“Another liability management exercise of the front end of the curve may make sense, especially as rates drop on stronger expectations of a Fed cut,” said Nathalie Marshik, a managing director for fixed income at BNP Paribas in New York.

In a response to questions, the Finance Ministry said it “couldn’t ignore the financial cost from the levels of referential rates,” when deciding which debt to sell, but that it also took into account the “cost of exchange rate volatility” and the liquidity of certain bonds. 

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The Plan

The ministry said at the start of January that it planned to offer an equivalent of $16.5 billion in bonds this year, 90% of which would be denominated in local currency. The government’s goal is to reduce hard-currency debt to 34% of the total from 35.7% at the end of 2023 following a jump during the pandemic, it said. 

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Chile may opt to offer notes in euros if their peso issuances do not pan out as expected, said William Snead, an analyst at Banco Bilbao Vizcaya Argentaria SA in New York. Still, if they stick to their current financing plan, that could support the performance of the dollar-denominated bonds by limiting supply, he added.

The prospect of further hard-currency bonds sales should buttress the peso, which has rallied 1.6% against the dollar since the 2029 notes were issued, more than any other of the major emerging market currencies.

Cash-Strapped

In selling bonds last week, Chile joined a series of emerging-market countries that have tested investor appetite following the holiday season. But there were more domestic than global reasons for Chile to join the rush, with dollar liquidity in the local market drying up.

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“Chile’s new bond issuance was expected by investors, not only helping to cover some hard currency bond obligations due in January, but also helping the Treasury to build its USD position,” Snead said.

The Finance Ministry had seen its liquid assets fall to levels deemed as “critical” by analysts at Banco Itau. The Treasury held just $1.1 billion in liquid assets in November, the lowest end-November balance in over a decade. Moreover, the Finance Ministry’s dollar balance slid to $301 million from $719 million at end of October.

Along with last week’s bond sale, the Finance Ministry also said on Thursday that it had withdrawn $800 million from the sovereign stabilization fund.

“The recent withdrawal from the Stabilization Fund is the first to take place in the absence of a domestic or global crisis, pointing to the magnitude and persistence of revenue weakness,” said Andres Perez, chief economist for Latin America at Banco Itau. 

The sale also defied concerns that ratings firms will lower the outlook or even the credit score on Chilean bonds after the government’s debt burden doubled in the past decade. Fitch Ratings and Moody’s Investors Service have stable outlooks, while S&P Global Ratings has a negative outlook. 

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Read more: Fear of Lower Credit Rating Lingers Over Chile’s Bonds

The spread was “quite tight and contradictory to the ratings outlooks,” said Marshik. 

ECONOMIC CALENDAR

All events in Santiago local time.

  • Chile:
    • Jan. 24 9:00am: December PPI
    • Jan. 26 8:30am: Central Bank Trader Survey
    • Jan. 26 12:30pm: Bloomberg January Economic Survey
  • International
    • US:
      • Jan. 24: S&P Global US Preliminary January Manufacturing PMI
      • Jan. 25: 4Q Advanced GDP
      • Jan. 26: December Personal Spending
    • China:
      • Jan. 25: Bloomberg January Economic Survey
    • Europe
      • Jan. 24: HCOB Eurozone January Manufacturing PMI
      • Jan. 25: ECB Main Refinancing Rate

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—With assistance from Sebastian Boyd.

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