El País Editorial
The government went out yesterday to international markets to seek funding in local currency and also to reprofile debt that expired in the short term, with a unprecedented operation.
As was? It is the first time that Uruguay issues two bonds in local currency globally – one in Indexed Units (UI) to inflation and another in pesos (which was a reopening) simultaneously (what in financial jargon is called dual tranche).
El País had anticipated that the most likely thing was that the government would come out with a debt issuance in UI, what happened yesterday.
Yesterday morning the government announced the issuance of a global bonus in UI with global maturity in 2045 (amortizable in three annual payments in 2043, 2044 and 2045) and the reopening of a global bonus in pesos that expires in 2033.
Added to this was the possibility of repurchasing debt that is in the hands of investors and that matures in the short term.
Specifically, the investors They could purchase the global bonds using as payment: cash, global bonds in UI with maturities in 2027 and 2028 and/or locally issued debt securities (Treasury Notes in UI or Central Bank Monetary Regulation Letters) maturing in 2024 and 2025.
This is also the first time that a global issue allows the use of locally issued securities as a form of payment.
According to a statement released last night by the Ministry of Economy and Finance (MEF) the operation had three objectives: “continue with the government’s funding program for the current year; support the process of debt de-dollarization of the government; continue developing the secondary bond market in local currency, establishing a new referral bonus (benchmark) in UI for a term of 20 years and increasing the liquidity of the reference bond in nominal pesos.”
Photo: Fernando Ponzetto.
What happened? During the morning and part of the afternoon, the placement banks that participated in this operation –HSBC Securities (USA Inc.), Itaú BBA USA Securities Inc. and Santander Capital Markets LLC– were receiving demand from investors.
Then the government indicates a reference of the interest rate at which the new bond could come out in UI and that leads investors to recalibrate their orders. If there is a lot of demand, the government can “tighten” the rate (that is, offer to pay a little less) and there will be investors who will continue, others will demand less than initially expected and others will lower themselves.
Once the final rate of return is defined (it was 3.4% for the global bond in UI for 2045), the order book is consolidated with investors who finally agree to purchase the debt security.
This book was made up of 58 investment accounts of USA, Europe, Asia, Latin America and Uruguay. Most of them are investment funds who have had Uruguay on their radar for a long time and in the case of the country, most of them are AFAP.
“Total demand for both bonds (including demand for shorter-term global UI securities) reached a maximum of US$2.6 billion equivalent,” according to the MEF.
With this, around 4:45 p.m. yesterday, the government had its cards on the table and decided to issue the bond in UI by 2045 for the equivalent of US$ 1.5 billion and, in turn, to reopen the bond in pesos by 2033. out of US$ 300 million (at a rate of return of 9.15%). Thus, Uruguay placed debt for US$ 1.8 billion.
Of the US$ 1,500 million equivalent of the bond in UI, US$ 1,250 million was cash and the other US$ 250 million were used for the exchange with global bonds in less mature UI.
“The operation involved low estimated concessions in rates of return (relative to reference rates in the secondary market the day before the broadcast announcement). In the case of the new global bonus in UI, the estimated concession was nine basis points (0.09%), and an almost zero concession in the nominal rate of return reopening of the global bond in pesos,” indicated the MEF statement.
This means how much more was paid compared to what the reference rates set in the market where already issued bonds are bought and sold, and that was minimal.
The government highlighted that “the 9.15% yield rate obtained in the reopening of the global bond in pesos for 2033 was lower than that obtained when this global bond was first issued in July 2023 (9.75%). ”.
“The sustained reduction in inflation And in the inflation expectations in the last year, together with the improvements in the credit rating, were fundamental factors to explain the improvement in the financing terms,” he added.
In turn, the inclusion of the domestic titles as eligible instruments (for the first time in a global operation) “sought to give greater financial flexibility for investors and enhance the volume demanded by the bonds issued, thus seeking better funding conditions for the government.”
In short, the government obtains funding for the equivalent of US$ 1,550 million in local currency (after the 2002 crisis, it seeks to have the money in “cash” to cover debt payments for 13 months), clears short-term debt maturities term for just under US$ 250 million and also establishes a new reference bond in UI and gives liquidity to the bond in pesos (which allows greater options for investors who want to buy or sell it).
