The Big Idea
Province Buenos Aires | Benchmark liquidity
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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.
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