Colombia Girds for Bond Coupon Shock to Cut Refinancing Risk

(Bloomberg) -- Colombia sold around $1.62 billion of bonds to repay existing US-dollar-denominated securities maturing in 2023 and 2024, even as it will cost the country more than twice the interest of its previous similar-length bond offering.

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The Latin American nation priced the 10-year notes at an 8.125% yield after preliminary price discussions of around 8.5%, the Finance Ministry said in a statement. The country raised $2 billion by selling 2032 bonds in April 2021, which were priced to yield 3.356%.

Demand totaled $4.2 billion, or 2.6 times the amount offered, the ministry said. Fitch Ratings and S&P Global Ratings cut Colombia to junk in 2021, though the nation still retains the second-lowest investment-grade rating at Moody’s Investors Service.

The money raised will be used to buy back $918,6 million of debt due in March 2023, February 2024, and May 2024, while $705.6 million of the proceeds will be used to pay the remaining 2023 global bond, the government said.

“It’s very good to see Colombia -- which is sort of a split rated sovereign -- back in the market,” said Nicholas Hardingham, a London-based senior vice president and emerging-market debt portfolio manager at Franklin Templeton. The fact that proceeds of the transaction will be used to repay shorter term maturities, is “a sensible approach.”

The deal would be the first in the US market since the election of President Gustavo Petro, a leftist politician who took office on Aug. 7. The Colombian peso has has weakened more than 20% since Petro was declared the winner after the runoff in June.

Borrowing costs for Latin American bond issuers in dollars, meanwhile, have improved in the last two months. The yield of Bloomberg Emerging Markets LatAm Statistics Index was 8.31% as of Friday, down from 9.4% on Sept. 20. The extra yield investors demand to hold high-yielding sovereign debt from emerging-market nations over US Treasuries has fallen to 8.48 percentage points points since peaking in late October, according to a JPMorgan & Chase Co. data.

“Timing is pretty good given the mini-rally we’ve had over the past few weeks,” said Jorge Ordonez, a credit strategist at BBVA Securities. “Rhetoric has calmed itself somewhat and the market seems to be easing into accepting that this really still is a high double-B credit getting priced well below its rating.”

For instance, Morocco which is also rated one step below investment grade by Fitch and S&P, has $1 billion of bonds due in December 2032 that are quoted to yield around 5.8%, according to Bloomberg prices.

Colombia is following Panama in selling new debt at more expensive terms than previous transactions to reduce its refinancing risk. The government managed to pass tax reform earlier this month that will raise around 1.3% of gross domestic product each year from 2023.

Even as financing terms in the emerging markets have been improving recently, not all countries will opt to push ahead with bond transactions. Paraguay, which is rated by at the same level as Colombia by Fitch, plans to stay away from global bond markets for the time being due to the increase in interest rates and instead seeks to finance its spending needs with loans from multilateral lenders early next year, Deputy Finance Minister Ivan Haas said.

HSBC Holdings Plc, Banco Santander and Bank of Nova Scotia managed the deal, according to people familiar with the matter.

--With assistance from Maria Elena Vizcaino, Daniel Covello, Matthew Bristow and Ken Parks.

(Updates with prices, total demand from first paragraph)

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