As Latin Bonds Rise, Morgan Prepares Issue for Argentina
With investors flocking to high-yielding bonds from Latin America, J.P. Morgan & Co. is preparing to underwrite a $100 million issue for Argentina - the country's first public issue since 1982.
The planned deal comes at a time when many Latin America economies are beginning to recover from their decade-long slump. Indeed, in a marked turnabout of investor sentiment, foreigners this year have already snapped up bonds from Chile, Venezuela, Mexico, and Brazil.
Bankers Trust, Chase in Deals
"We've got what's called a bull market," said one international banker, who declined to be identified. "The issues are high-yield and liquid."
So far this year, Morgan has underwritten three bond offerings that will raise $700 million for Latin American customers.
Bankers Trust New York Corp., Chase Manhattan Corp., and a handful of other big banking companies are also doing Latin bond deals.
What's especially noteworthy about the latest deal is that Argentina has hardly paid a penny on its debt to foreign banks in three years. The nation now owes more than $7 billion in interest on about $33 billion in borrowings, including $3.8 billion from U.S. banks.
But some bankers said they expect Morgan to have little difficulty marketing the two-year notes. In fact, Morgan is gearing up to increase the size of the issue if demand proves strong enough, the bank's spokesman said.
Repayment Ability Discounted
Argentina's inability to repay billions of dollars in borrowings from foreign commercial banks and make good on its interest arrears should not affect demand. a Morgan spokesman said.
"People are looking at the fundamentals, and they see potential for strong growth and a good return from Argentina," the spokesman added.
The securities are being sold through banks to offshore private investors in places like Luxembourg and Geneva.
Risks Pointed Out
Nonetheless, some observers warned that Morgan and other banks may be playing with fire by bringing to market issues on behalf of countries that have yet to reschedule their commercial bank debt.
"Morgan's being very opportunistic, but it's a totally backwards deal," said one investment banker who declined to be identified.
"If these countries see they can go to the market without first reaching a debt restructuring agreement, they'll have even less reason to settle with the banks."
Writedowns on LDC Loans
U.S. banks are barely out from under the weight of the ill-advised loans they made in Latin America. Regulators have ordered them to write down 70% of their loans to Argentina, for example.
Argentina has yet to reach an agreement with the International Monetary Fund on introducing economic reforms and begin talks with banks on rescheduling its unpaid borrowings and interest arrears.
No pricing has been disclosed for the Argentina issue, which will be marketed to offshore investors in Europe and elsewhere. However, banking sources said pricing could run hundreds of basis points over interest rates on equivalent U.S. government securities.
Earlier Deal with Brazil
This is the second time in recent weeks that a Latin American country owing billions of dollars to foreign commercial banks has turned to the capital markets for funding.
On July 10, Chase Manhattan underwrote a two-year issue for Petrobras, the state-owned Brazilian oil company.
The issue, priced at 650 basis points over equivalent U.S. Treasuries for a 13.5% yield, was increased to $250 million from $100 million after it was heavily oversubscribed.
Morgan and other U.S. commercial banks are reportedly seeking additional mandates for issues by several Mexican corporations.