The Big Idea
Province Buenos Aires | Benchmark liquidity
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Settlement of the new BUENOS’37A issue with huge benchmark liquidity of $6.2 billion has not yet translated into an active secondary. Blame it on a lopsided market with few sellers as bondholders hold onto the high carry. It is interesting that bond prices are barely changed from the grey market with a persistent 18.5% yield-to-average-life that offers a high premium to the sovereign and PDCAR curves. Stay overweight the BUENOS’37A and switch out of the Argentine sovereign curve. The total target returns should focus on either the high 8.5% current yield and low cash price or the potential for capital gains on convergence with the sovereign curve. The positive technicals alone warrant a tighter spread to the sovereign and add to that the province’s better prospects for liquidity and solvency.
Although the Province of Buenos Aires is off-benchmark as a provincial issuer, the liquidity of the $6.2 billion issue should rival in liquidity to other LatAm sovereign issuers. It is interesting that the majority of the 1.2 billion of EUR-denominated bonds involved in restructuring the province’s debt crossed currency to exchange into the USD benchmark status of the 2037A with now only EUR353 million split in two separate EUR tranches. The only liquidity comparison of the BUENOS’37A within the region is the sovereign itself. This is a unique status for PBA that had previously always suffered from “illiquidity risk premium.” This new liquid status should attract more crossover investors willing to seek a higher yield proxy to the sovereign with similar upside, or arguably more positive convexity, on the prospect of spread convergence.
The relative value in the issue remains good with continuing potential for capital gains. The 18.4% yield-to-average-life offers substantial premium to both the sovereign and PDCAR curves with implied fair value at 17.5% or 15.2% flat to the interpolated curves. BUENOS’37A appears particularly misaligned to the PDCAR curve with a 342 bp spread premium against similar duration PDCAR’29. These are the two provinces with a long track record of relative comparison and that typically trade in a tight range. For the liquidity comparison alone, it should be much tighter at tranches of $456 million (PDCAR’29) versus $6.2 billion. It is not clear whether the prior relative value metrics also hold on comparisons between BUENOS and the sovereign with no longer the same 100 bp to 200 bp illiquidity risk premium. It’s difficult to rationalize the wide 100 bp to 230 bp spread differential to the sovereign curve other than for its off-benchmark status. Perversely, the off-benchmark strategy is exactly the winning strategy based on YTD relative outperformance of quasi-sovereigns and corporates against the sovereign. This is still our view on the logic of higher current yield of the BUENOS’37A at 8.5% versus 6.5% for the highest current yield of the ARGENT’41 on the sovereign curve with much better cash flow and leverage ratios and the same positive convexity as a spread product to the sovereign.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
