Commentary & Deal Flow

Here’s a question that may or may not come in handy at your local trivia night: what do Uruguay, Austria, and Slovakia have in common?

Answer: after Uruguay priced a $400m-equivalent on June 26 via BNP Paribas and UBS, it is one of the only three countries with sovereign bonds outstanding in Swiss francs.

CFR caught up with Herman Kamil, head of Uruguay’s sovereign debt management office, after an unusual deal that won’t be the sovereign’s last in the currency.

“We were satisfied with the deal, which opened a new funding channel, allowing us to put a flag in a new market at a low absolute cost of funds,” said Kamil. “It is not intended to be a one-off deal.

“Rather, our idea is to develop our presence gradually in that market going forward”.

Uruguay’s five-year came in a yield of just 1.04%, and the 10-year at 1.6175%, so it’s very cheap all-in funding. But others highlighted the message it sent to Uruguay’s other bond curves. Balanz, for example, argued that the Swiss franc deal had pushed the sovereign’s nominal peso curve tighter, as it “delays the potential [Uruguayan peso] bond issuance, easing the risk of imminent new supply in the local currency curve”.

Economists at TPCG called it “good news” for holders of Uruguay’s dollar bonds. “The sovereign has found a non-indexed pocket of capital to meet obligations, reducing near-term funding risk and pushing any potential new issuance pressure further down the calendar,” they wrote.

Switzerland has a fairly conservative bond market. Even the finance ministry’s exceptionally thorough and insightful press release (kudos to that comms team!) noted that Swiss investors tend to restrict themselves to borrowers rated A- or higher.*

Even as the second highest rated sovereign in Latin America and very much on an upwards trajectory, at Baa1/BBB+/BBB Uruguay is on the riskier end of what Swiss accounts usually buy.

Given this and the lack of comps, a fair amount of investor education and price discovery was required: the issuer undertook over 30 in-person meetings over two days in Geneva, Basel and Zurich, before another day of virtual meetings that also encompassed accounts from Bern and Lucerne.

But it does leave limited copycat candidates.

Chile of course could issue: but does it want/need to? Consensus among bankers was “unlikely”. And it would have to weigh any Alpine adventure against the likelihood it would cannibalize the Swiss franc curves of the country’s banks, for whom Switzerland is a key funding market. Meanwhile, Mexico and Peru’s single-A ratings are just sweet memories for now…

So, not a one-off for Uruguay itself. But it will probably remain Latin America’s lone sovereign flag in the Swiss bond market for a while.

Uruguay's next outings will be closer to home.

“Although we envisage returning to international bond markets before the end of the year, our focus will now be on the upcoming auction calendar for domestic market issuances,” Kamil told CFR.

*Argentina’s ill-fated visit in 2017 – the Swiss market’s last flirtation with LatAm sovereigns – was very much the exception. And Panama’s recent CHF1bn loan with Citi (three years at 2.39%) is a whole other story that we may get into at another time…