The Big Idea

World: El Salvador | Victory lap

| September 30, 2022

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.

The latest tweets from El Salvador’s President Bukele promising to pay back debt arguably had more impact than the country’s buyback of $565 million of its own debt. But both have triggered a bounce in El Salvador’s Eurobonds and the unwind of rollover and liquidity risks. There is still no clear economic plan for debt sustainability. Still, there’s good reason to stay constructive on bond payments in the near term. El Salvador’s debt likely has another 10 points of upside across the curve and maybe another 25 points on the 2025s as the country commits to paying for longer.

Investor skepticism has been extreme lately with selling of Eurobonds after the Bukele administration failed to commit to an IMF program or an alternative medium-term economic framework—one including the IMF’s recommended 4% of GDP fiscal consolidation. Bond prices reached lows in the 20s without any obvious sponsorship from real money or crossover investors.  This now looks to be shifting as the Bukele administration reaffirms their willingness to pay bondholders.

The initial buyback offer was mostly brushed off as irrelevant with only a lukewarm reaction and relatively unchanged bond prices. Bond prices then adjusted much higher after President Bukele announced a follow-up transaction to again buyback more 2023 and 2025 bonds within eight weeks.  The almost violent bounce in bond prices reflects an underweight positioning of investors as well as the sudden realization that there is commitment to pay Eurobonds.

The commitment to pay Eurobonds is typically stronger in the early phase of cash flow stress. This should favor the shortest tenors including the 2023s and the 2025s. The prepayment of the 2025s should offer significant cash flow relief with no other large amortizations until 2027. The most important takeaway is that the Bukele administration is prioritizing external over domestic liabilities.  It’s not clear whether El Salvador will launch another transaction in two months; however, there is strong commitment to pay the final maturity within four months.

It’s important to understand the motivations of the transaction. There are obvious cash flow benefits from buying back heavily discounted bonds trading in the 50s. These dynamics almost unwind on pre-announced transactions with the 2025s initially moving from 35 to 50 and now approaching 60.  There are still some savings compared to the NPV of other 2Y maturity bonds in Latin America that trade near par.

Perhaps more important than the cash flow savings for the Bukele administration is the prestige factor.  The low bond prices and high implied probability of default were a vote of no confidence from the markets.  This contrasts against a country that seeks international prestige and legitimacy. El Salvador has hosted various Bitcoin-related international events with frequent diplomatic trips abroad including the recent presentation from President Bukele at the UN and a high-profile TV interview in the US. The headline event of default wouldn’t coincide with the image of prosperity under the Bukele administration and the transition from gangs and violence to tourism and financial freedom.  There may not (yet) be a coherent medium-term economic plan for fiscal consolidation; however, there has been a slow improvement on the fiscal accounts with forced austerity from a deceleration in spending.  To prioritize Eurobond payments, the Bukele administration could source pockets of liquidity at the central bank or re-prioritize budgetary revenues and financing sources over the next four months.

The next transactions should have a meaningful impact on bond prices.  The next buyback transaction may not prove as successful on lower turnout and less cashflow savings; however, it would still reaffirm the willingness to repay. And there are only four months remaining for the 2023 stump amortization payment.  This would then alleviate the payment calendar with only 50% of the 2025s remaining and a still latent threat of another buyback that should create a floor on bond prices.

If we reference the PdVSA 2016 on two years until maturity in the early phase of cashflow stress of the Maduro administration in 2014, then rough guidance suggests the 2025 should trade near 75. The rest of the curve should also re-price on the optionality of upfront payments with average 18 points of coupons through January 2025 allowing for overly conservative recovery value at 20 against the historical lows of 30.  This suggests optionality for prices to trade still another 10 points higher towards 50, especially if there are prospects to avoid default beyond 2025. We have been bullish on a short-term tactical view ahead of the buyback operation last month and remain constructive through the January 2023 payment.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539
siobhan.morden@santander.us

 

U.S. Fixed Income Trading Commentary Disclaimer

This commentary has been prepared by the U.S. fixed income trading desk of Santander Investment Securities Inc. (together with its affiliates, “Santander”) for its institutional investor clients only, and may under no circumstances be redistributed beyond the recipient in whole or in part.  The recipient is an “institutional account” as defined in FINRA Rule 4512(c) that (i) is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies and (ii) will exercise independent judgment in evaluating any potential investments and any recommendations of any broker-dealers.  For the avoidance of doubt, this commentary is not suitable for or intended for retail investors. 

This commentary has not been produced or reviewed by, and does not otherwise reflect the views or input of, the Research Department of Santander (“Santander Research”).  This commentary may conflict with the views of Santander Research, is not subject to all of the independence and disclosure standards applicable to research reports prepared for retail investors and is not independent from the interests of Santander.  Santander may have positions (long or short) in, effect transactions in or make markets in the subject securities (or related derivatives) mentioned in this commentary, and such positions or trading may be inconsistent with this commentary.  However, Santander is under no obligation to make a market in or otherwise provide liquidity in any security discussed herein.  This material may have been previously communicated to Santander’s trading desk.  Santander may have in the past or may in the future provide investment banking services (including underwriting activity and loans) or other services for the companies mentioned in this commentary.

This commentary has been provided for informational purposes only and is not a recommendation, offer or solicitation for the purchase or sale of any security or related instrument.  This communication is intended to be short term and brief in nature, and therefore does not provide a full analysis of any issuer or security or a sufficient basis upon which to base an investment decision.  The individual circumstances of the recipient’s investment objectives and needs have not been considered in this commentary, and nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to the recipient’s individual circumstances.  Information contained herein has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy or completeness.  The recipient should not rely on this commentary for any investment decision or other action, and Santander expressly disclaims any liability for any losses arising from any reliance on or otherwise related to this commentary.  This commentary reflects the personal views of the individual sender of such commentary, and no part of his or her individual compensation was, is or will be directly or indirectly related to its content.  This commentary is provided as of the date and time thereof, and Santander does not undertake any responsibility to update or revise any of the information contained herein, which may change without notice.  Past performance is not indicative of future results.

Fixed income securities, including those described herein, are subject to many risks, including, but not limited to, interest rate risk, the credit risk of the issuer, inflation risk, liquidity risk and risk of a downgrade by rating agencies.  Emerging markets investments are additionally subject to political, economic, legal, regulatory, market, settlement, execution, currency and other risks.  Fixed income, and specifically emerging markets, investments are not suitable for all investors. 

Santander Investment Securities Inc. is an SEC registered broker-dealer, FINRA member and SIPC member.  Santander Investment Securities Inc. is a direct, wholly-owned subsidiary of Santander Holdings USA Inc., which is a direct, wholly-owned subsidiary of Banco Santander, S.A

Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

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.

The Library

Search Articles