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October 24, 2014
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City has US$600M in dollar bonds

The steep devaluation has come at a bad time for City Mayor Mauricio Macri’s government.
By Mariano Beldyk
For The Herald

Strategy to seek financing through US$-linked debt could become a trap

Buenos Aires City government’s strategy of funding itself mainly through dollar-linked bond issue could become a financial trap if the price of the legal dollar continues escalating, as it did last week when it crossed the eight-peso barrier.

During 2013 and the current month alone, City Hall has issued nearly US$ 600 million in dollar-linked bonds whose payment is programmed to be made in local currency but tied to the variation of the official dollar plus the agreed interest rate.

That means that the broader the devaluation, the more money local government will have to pay to bond-holders once the titles mature, placing a question-mark over the Treasury’s capacity if the breach continues widening.

Just last week, City Hall coffers lost US$ 17 million in 24 hours as a result of the legal dollar jumping from 7.14 to 8 pesos in one day after the centre-right PRO party’s administration launched its last series of IV Class Debt Titles for a total of US$147 million.

Yet, the financial nightmare could have been worse had it not been for the Central Bank intervening to diminish the peso’s devaluation spread, the largest in a decade.

Finance Minister Nestor Grindetti’s funding scheme labelled “Local Market Funding Programme” was forged as an alternative door to credits without having to request the national government’s consent to foreign lines — something Mayor Mauricio Macri has always denounced as being denied by Kirchnerism for political reasons.

Dollar-linked bonds then became an attractive option for local players who wanted to invest their pesos in the dollar or euro, ducking the national government’s currency controls.

According to financial reports, its eventual variation following any sharp depreciation of the peso represents a more reliable way of preserving the investment’s value in a context of uncertainty.

They even provide a larger repayment than fixed-term deposits whose interest rate climbed, in some cases, to an annual 18 percent in 2013.

A report published on September 2013 by the Capital Market Argentine Institute (IAMC) estimated that only last year, the dollar-linked bonds became a better choice over other dollar-class titles like Bonar 2013, which even pay holders in foreign currency.

Hedge funds and insurance companies constituted the largest group among dollar-linked investors, the publication stated, and minor savers did not exceed 20 percent in total.

Last Wednesday’s BA City bonds, for example, were released with a three-year period of grace and represented only a 1.95 percent annual fixed rate to be reimbursed in six consecutive payments between July 2017 and January 2020.

Macri’s administration ended up pocketing US$147 million — the amount the local authorities calculated as necessary for their infrastructure works — while receiving offers for nearly US$170 million.

In December 2013, City Hall issued US$113 million in dollar-linked titles to attack the garbage problem — half the total amount collected on May 2013 when the local government launched another series of dollar-linked debt titles for US$216 million for funding Subte Line H works and buying new convoys for the same subway line.

Their repayment won’t start until 2016 and in subsequent six-month payments to 2019.

Only two months before, another 100-million-peso series was released with an unprecedented five-year term of repayment.

“The largest bond issued by any City or provincial government since 2010,” celebrated City Hall financial head Grindetti.

Now their holders are the ones rejoicing for they will see their money multiplied at the pace of devaluation.

@mibeldyk

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