The Big Idea
Colombia | Buying back debt, diversifying funding
This material is a Marketing Communication and does not constitute Independent Investment Research.
Colombia’s recent deal to take out $8.4 billion or almost a quarter of its US dollar debt has delivered impressive results so far. Its sovereigns have returned 3.8% this month, the top Latin America performer. It’s benchmark COLOM’45 yields now stand 200 bp tighter than April levels. Mutual fund holdings reports should soon confirm a sharp reduction in a heavy overweight country allocation. Technicals matter. And there may still be room for more spread compression to ‘BB’ peers.
The back-to-back transactions orchestrated by Colombia with a buyback price premium offered an opportunity for investors to reduce their overweight exposure. There may be some regret on the part of some investors with prices still higher in the aftermath. The reduction in supply meets resilient external demand with demand for risky assets at peak highs and EMBIG spreads grinding below multi-year lows.
Colombia is unique as an issuer with a spread premium to ‘BB’ peers even after a mature phase of spread compression across other rating categories. It was also quite effective for Colombia to then seek incremental demand next from euro-denominated investors to protect the favorable supply-and-demand dynamics in the US dollar Eurobond markets. The euro markets are only a secondary funding market, but they do provide some temporary relief with now $4.5 billion of the $5 billion Eurobond 2026 funding program done for next year. Or, alternatively, this funding may represent the funds to pre-pay back the Swiss-franc denominated liabilities for next year. This would reduce rollover risk. The re-tap of the euro markets shows continuing core demand across Europe with the opportunity to pre-fund the March 2026 maturity and maintain exposure to alternative cheaper funding markets.
There has been some criticism that the buyback transaction will shorten the debt maturity profile and increase rollover risks. Short-term Swiss franc loans funded the buyback of long maturity Eurobonds. However, Colombia has some flexibility with its average 10.5-year debt maturity, and it quickly re-entered the market to secure 3- to 10-year euro-denominated funding. There are also clear advantages to a net reduction in debt and focusing the buyback on discounted longer maturity bonds and reducing the cost of funding.
The lower cost of funding is quite relevant. It not only reduces the high 4.7%-of-GDP debt service but also triggers a virtuous circle on the repayment of the Swiss franc loans (on now lower cost of funding for Eurobonds) as well as the positive pass-through to investor sentiment. There is the pseudo “halo effect” with lower bond yields translating into more positive investor sentiment and broader confidence on debt liability management.
This also coincides with a structural shift in investor sentiment heading into Colombia’s election cycle on optimism about the political and economic transition. This was the consensus investment strategy for many investors—to add to overweight exposure heading into the yearend election cycle. This was maybe a critical assumption on the debt liability management plans. This should reduce the rollover risks with the opportunity to repay the Swiss franc liability at a moment of lower yields and higher investor demand. There are no specific details on the Swiss franc repayment terms; however, it seems fair to some flexibility that would smooth out a bulky payment next year while the latest euro funding should reduce financing risks heading into next year. This would provide some critical support that extends the favorable supply-and-demand dynamics into next year.
Meanwhile, the supportive technicals imply further spread compression and convergence with ‘BB’ peers like Panama and the Dominican Republic. There is still premium on the 10-year sector of the curve relative to peers. This may not represent the targeted buyback sector with preference on the shortest maturities for lower rollover risk and the longest discounted maturities for lower debt stock. However, the intermediate tenors should still benefit from resilient market demand that seeks incremental yield. There is also less funding risk after the pre-funding for next year with a liquidity buffer to then seek only opportune market conditions maybe at still lower yields.
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