By Sebastian Boyd - Jul 30, 2010 10:17 PM GMT+0800
Chile sold its first international bond in six years at a record-low yield as investors demanded less than half the premium on comparable debt from higher-rated Italy.
Chile sold $1 billion in 10-year notes in dollars yesterday to yield 90 basis points, or 0.9 percentage point, above U.S. Treasuries. The South American country also sold $520 million of bonds in pesos at 5.5 percent, cutting about 60 basis points, or $24 million, from its cost of borrowing in its own currency, Finance Minister Felipe Larrain said.
The extra yield, or spread, Chile paid for the dollar debt was 0.6 percentage point less than the region’s biggest economy Brazil paid to borrow for 11 years in April. Chile, the world’s largest copper exporter, is raising money to help cover the cost of rebuilding from an earthquake in February that killed about 500 people and caused $30 billion in damage.
“We have examined all the foreign bond sales placed by the Republic of Chile since 1822 and this is by far the lowest rate,” Larrain told reporters in a conference call from New York yesterday. “This is good news for Chileans because it means lower interest rates. Companies will be able to borrow at lower rates, stimulating investment and employment.”
Citigroup Inc., HSBC Holdings Plc and JPMorgan Chase & Co. managed the sale. Investors placed $5.7 billion in orders for the dollar bonds and $3.8 billion for the bonds in pesos.
Proposed Spread Cut
The three banks reduced the proposed spread on the dollar bonds from 95 basis points and increased the proposed size of the peso bond from $500 million while lowering the yield from 5.625 percent, a person familiar with the transaction, who declined to be identified because terms weren’t set, said.
“It’s extremely good, as expected,” said Alberto Ramos, an economist at Goldman Sachs Group Inc. “Everybody knew that Chile is the best credit out there in Latin America. They haven’t been in the market since 2004 so there was significant pent-up demand for Chilean paper.”
President Sebastian Pinera’s government, which took office in March, plans to raise $4.7 billion this year from tax increases, copper income and selling assets such as minority stakes in water companies. It’s seeking $20 billion through 2013 to pay down a $2.5 billion deficit, cover the earthquake repairs and fund $9 billion of extra spending.
More Sales
More international bond sales “haven’t been ruled out, but definitely not this year,” Larrain, 52, said yesterday. Latin America’s highest-rated sovereign borrower has $10.9 billion in copper savings, which Larrain will use “modestly”, he said on July 22.
The yield on Chile’s domestic 10-year bonds in pesos fell eight basis points to 6.07 percent yesterday as traders took into account the lower yield for Chile’s borrowing abroad, said German Fritsch, head of trading at Deutsche Bank AG in Santiago. The yield on Chile’s dollar bonds due in 2013 fell seven basis points to 1.7 percent. Chilean interest-rate swap rates also fell following news of the pricing. The 10-year swap rate fell five basis points yesterday and a further three basis points today to 5.61 percent, the lowest since March 1.
The peso bond sale marks the beginning of the government’s plan to internationalize its currency.
“Pricing bonds at these levels, far inside the domestic yield, is an excellent start,” Fritsch said. “It sends a very good signal to Chilean companies. You’re diversifying your funding sources by going offshore and saving money.”
The peso weakened 0.1 percent to 523.85 per U.S. dollar as of 10:15 a.m. today from 523.55 at yesterday’s close.
Moody’s Raises
Moody’s Investors Service in June lifted its rating on Chile’s foreign currency debt to Aa3, the fourth-highest. Standard & Poor’s ranks it one level lower at A+ and Fitch Ratings grades it one level lower still at A.
The extra yield investors demand to buy Italy’s $3.5 billion 6.875 percent bonds due in 2023 instead of U.S. Treasuries was 189 basis points yesterday. Brazil’s 4.875 percent bonds due in 2021 traded yesterday at a spread of 141 basis points, according to BNP Paribas prices.
Moody’s rates Italy’s debt Aa2, a level above Chile, Standard & Poor’s ranks it A+, the same as Chile, while Fitch Ratings grades it AA-, two steps above its rating on Chile’s bonds. Brazil is rated Baa3, the lowest investment grade, by Moody’s and an equivalent BBB- by Standard & Poor’s and Fitch.
Chile’s 10-year credit-default swap spread was 98 basis points yesterday, according to CMA Datavision in New York, compared with 142 basis points for Brazil or 139 for Italy. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The yield on Chilean bonds sold yesterday is “the lowest in Latin America, very much below the rates achieved by great powers like Brazil and this figure even puts us at a European level for borrowing,” said Pinera, according to a recording of his remarks published by the finance ministry.
To contact the reporters on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net
from Bloomberg published on Jul 30, 2010 10:17 PM GMT+0800