LatinFinance - January/February 2014 - 40

SOVEREIGN BOND

QUASI-SOVEREIGN BOND  

Republic of Chile $1.5 bn 2022/2042

Petrobras $11bn
jumbo

On the shortlist of
candidates for Sovereign
Bond of the Year, there
were deals with impressive
structures, sizes and
execution, and which met
a strong welcome from
investors and peers. But the
Republic of Chile's dualtranche issue stood out in
particular for landing the
lowest-ever coupon and
yield for an emerging market
bond.
The sovereign sold the
$1.5 billion bond in October
2012, coming to market
with a 10-year note and its
first 30-year international
benchmark.
The republic wanted
to develop its yield curve,
establish a long-dated
reference point for corporate borrowers,
and to raise funds at low rates.
"We wanted to establish a benchmark for
our private and public companies following
the Republic's bond issue, to allow our
companies to go to the international
markets and raise money on the cheapest
terms," Chile's finance minister Felipe
Larraín told LatinFinance following the
transaction.
Within 90 minutes of announcing the
deal, lead managers Bank of America
Merrill Lynch, HSBC and JPMorgan had
taken nearly $9 billion of orders. With that,
they lowered the yield on offer, setting price
guidance on the 10-year at 60 basis points
over US Treasuries, and on the 30-year
at 80 basis points over. Both levels were
around 15 basis points tighter than initial
spread indications.
Ultimately, the two $750 million tranches
were priced a further five basis points
tighter, at 55 basis points and 75 basis points
over Treasuries. Investors stayed the course
despite the leads squeezing the price: there
was around $8 billion of demand for the

40 LATINFINANCE.COM - January/February 2014

©REUTERS

Chile impressed with the lowest coupon and yield ever
achieved by a Latin American issuer for the 10 and 30-year
tranches

NEW LOWS: Chile's dollar bonds were
priced at a record yield, although the
sovereign still sees value in local currency
debt says finance minister Felipe Larraín

deal at the final level. Around 300 accounts
placed orders for each tranche.
That pricing squeeze pushed Chile's
bonds not only tight against its outstanding
paper - but also to record lows. The 2.25%
coupon and 2.379% yield on the shorter
tranche were the lowest-ever from an
emerging market issuer for a 10-year bond,
while the 3.625% coupon and 3.714% yield
on the long tranche were the lowest ever for
a 30 year from Latin America.
Larraín said that the sovereign's success
in placing the deal would help it attract
foreign direct investment, reducing the cost
at which it can draw capital to its economy.
"When we go to the markets, we reduce
the cost of capital for the government and
for our companies. The fact that we get
important recognition internationally helps
us in attracting FDI and it helps us reduce
the cost at which we can attract capital to
our economy." LF

Timing, size and execution
were all remarkable in this
attention-grabbing bond
sale
Size is not everything. Nor is timing. But
when the two elements come together
in as a spectacular fashion as they did for
Petrobras' $11 billion bond issue in May
2013, the result is often extraordinary.
The A3/BBB/BBB rated borrower sold
a six-tranche issue, drawing an order
book of around $45 billion - enough to
make the deal even bigger, had it wanted
to. "Although we had demand to have
done a larger size, we were considering a
maximum of $11 billion," Almir Barbassa,
Petrobras' chief financial officer told
LatinFinance at the time of the sale.
As it was, the deal qualified for a
number of superlatives: the largest from an
emerging market borrower; the fifth-largest
corporate transaction ever; and, at the time
the second-largest corporate bond globally
in 2013.
At the short end, the borrower sold fixed
and floating rate notes with three and 5.5
year maturities. A $1.25 billion 2016 fixed
rate bond was priced to yield 2.144%, or 175
basis points over US Treasuries, while a $1
billion 2016 floater came at 162 basis points
over Libor. A $2 billion 2019 fixed-rate bond
was priced to yield 3.125%, or 230 basis
points over Treasuries, while the $1.5 billion
2019 floating-rate was priced at 214 basis
points over Libor.
The 10-year tranche was the most
sought-after of the six, drawing some $13.6
billion of orders. It was sized at $3.5 billion,
yielding 4.522%, or 260 basis points over
Treasuries. At the very long end, a $1.75
billion 2043 was priced to yield 5.764%,
equal to 265 basis points over Treasuries.
Bank of America Merrill Lynch, Banco
do Brasil, Citi, HSBC, Itaú, JPMorgan and
Morgan Stanley managed the deal.
The sale was also immaculately timed.
No sooner had Petrobras reaped such
extraordinary demand from investors,
emerging markets fell abruptly out of favor.
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LatinFinance - January/February 2014

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